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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549

FORM 10-Q
(Mark One)
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period endedSeptember 30, 2020
or
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from  _______________ to _______________
Commission File No. 1-13998
nsp-20200930_g1.jpg
Insperity, Inc.

(Exact name of registrant as specified in its charter)
Delaware 76-0479645
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
19001 Crescent Springs Drive
Kingwood,Texas77339
(Address of principal executive offices)
(Registrant’s Telephone Number, Including Area Code):  (281) 358-8986
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTicker symbol(s)Name of each exchange on which registered
Common Stock, $.01 par value per shareNSPNew York Stock Exchange
Rights to Purchase Series A Junior Participating Preferred StockNSPNew York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes   No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes   No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company.  See definition of “large accelerated filer,” “accelerated filer”, “non-accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filerAccelerated filer
Non-accelerated filerEmerging growth company
Smaller reporting company



If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes   No

As of October 26, 2020, 38,354,147 shares of the registrant’s common stock, par value $0.01 per share, were outstanding.


TABLE OF CONTENTS
Page
Part I, Item 1.
Financial Statements
Part I, Item 2.
Part I, Item 3.
Part I, Item 4.
Part II, Item 1.
Part II, Item 1A.
Part II, Item 2.
Part II, Item 6.


FINANCIAL STATEMENTS
(Unaudited)
PART I
Item 1. Financial Statements
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)September 30, 2020December 31, 2019
Assets
Cash and cash equivalents$372,356 $367,342 
Restricted cash45,265 49,295 
Marketable securities33,994 34,728 
Accounts receivable, net528,712 465,779 
Prepaid insurance34,759 10,418 
Other current assets33,772 43,493 
Income taxes receivable 3,691 
Total current assets1,048,858 974,746 
Property and equipment, net of accumulated depreciation196,210 147,706 
Right-of-use (“ROU”) leased assets60,682 56,886 
Prepaid health insurance9,000 9,000 
Deposits – health insurance7,900 8,100 
Deposits – workers’ compensation181,634 175,913 
Goodwill and other intangible assets, net12,707 12,714 
Deferred income taxes, net 3,956 
Other assets6,291 5,975 
Total assets$1,523,282 $1,394,996 
Liabilities and stockholders' equity
Accounts payable$6,016 $4,565 
Payroll taxes and other payroll deductions payable178,052 277,248 
Accrued worksite employee payroll cost471,796 401,859 
Accrued health insurance costs44,639 21,180 
Accrued workers’ compensation costs47,956 52,868 
Accrued corporate payroll and commissions39,925 52,612 
Other accrued liabilities46,400 58,713 
Income taxes payable6,286  
Total current liabilities841,070 869,045 
Accrued workers’ compensation cost, net of current196,247 193,609 
Long-term debt369,400 269,400 
Operating lease liabilities, net of current64,436 58,863 
Deferred income taxes, net2,801  
Other accrued liabilities, net of current8,689  
Total noncurrent liabilities641,573 521,872 
Commitments and contingencies
Common stock555 555 
Additional paid-in capital74,598 48,141 
Treasury stock, at cost(620,638)(544,102)
Retained earnings586,124 499,485 
Total stockholders’ equity40,639 4,079 
Total liabilities and stockholders’ equity$1,523,282 $1,394,996 
See accompanying notes.
Insperity | 2020 Third Quarter Form 10-Q
4

FINANCIAL STATEMENTS
(Unaudited)
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended September 30,Nine Months Ended September 30,
(in thousands, except per share amounts)2020201920202019
Revenues(1)
$1,007,820 $1,043,388 $3,230,669 $3,239,714 
Payroll taxes, benefits and workers’ compensation costs
822,787 872,842 2,591,365 2,668,716 
Gross profit185,033 170,546 639,304 570,998 
Salaries, wages and payroll taxes89,429 79,264 266,640 237,340 
Stock-based compensation20,864 6,517 38,110 20,813 
Commissions7,722 8,034 23,657 22,727 
Advertising4,781 4,895 15,334 17,474 
General and administrative expenses25,646 29,773 85,254 92,801 
Depreciation and amortization7,819 7,330 23,329 20,929 
Total operating expenses156,261 135,813 452,324 412,084 
Operating income28,772 34,733 186,980 158,914 
Other income (expense):  
Interest income103 2,574 2,351 8,621 
Interest expense(1,731)(2,122)(6,312)(5,442)
Income before income tax expense27,144 35,185 183,019 162,093 
Income tax expense7,135 9,326 49,067 31,389 
Net income$20,009 $25,859 $133,952 $130,704 
Less distributed and undistributed earnings allocated to participating securities
(104)(284)(792)(1,546)
Net income allocated to common shares$19,905 $25,575 $133,160 $129,158 
Net income per share of common stock
Basic$0.52 $0.64 $3.45 $3.19 
Diluted$0.51 $0.63 $3.43 $3.18 
 ____________________________________
(1)Revenues are comprised of gross billings less worksite employee (“WSEE”) payroll costs as follows:
Three Months Ended September 30,Nine Months Ended September 30,
(in thousands)2020201920202019
Gross billings$6,563,727$6,555,865$20,356,164$19,804,549
Less: WSEE payroll cost$5,555,907$5,512,477$17,125,495$16,564,835
Revenues$1,007,820$1,043,388$3,230,669$3,239,714
See accompanying notes.
Insperity | 2020 Third Quarter Form 10-Q
5

FINANCIAL STATEMENTS
(Unaudited)
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended September 30,
(in thousands)20202019
Cash flows from operating activities
Net income$133,952 $130,704 
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization23,329 20,929 
Stock-based compensation38,110 20,813 
Deferred income taxes6,757 8,659 
Changes in operating assets and liabilities:
Accounts receivable(62,933)(83,267)
Prepaid insurance(24,341)(13,750)
Other current assets9,721 1,283 
Other assets and ROU assets10,862 (2,709)
Accounts payable1,451 (5,249)
Payroll taxes and other payroll deductions payable(99,196)(80,549)
Accrued worksite employee payroll expense69,937 81,478 
Accrued health insurance costs23,459 (1,914)
Accrued workers’ compensation costs(2,273)6,087 
Accrued corporate payroll, commissions and other accrued liabilities(32,238)(22,830)
Income taxes payable/receivable9,977 (12,609)
Total adjustments(27,378)(83,628)
Net cash provided by operating activities106,574 47,076 
Cash flows from investing activities  
Marketable securities:  
Purchases(42,007)(90,909)
Proceeds from dispositions484 5,799 
Proceeds from maturities41,860 85,480 
Property and equipment:
Purchases(68,770)(35,968)
Net cash used in investing activities(68,433)(35,598)
Cash flows from financing activities
Purchase of treasury stock(91,216)(153,668)
Dividends paid(46,522)(36,777)
Borrowings under revolving line of credit100,000 95,000 
Other6,302 7,215 
Net cash used in financing activities(31,436)(88,230)
Net increase (decrease) in cash, cash equivalents and restricted cash6,705 (76,752)
Cash, cash equivalents and restricted cash beginning of period592,550 535,474 
Cash, cash equivalents and restricted cash end of period$599,255 $458,722 
Insperity | 2020 Third Quarter Form 10-Q
6

FINANCIAL STATEMENTS
(Unaudited)
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
Nine Months Ended September 30,
(in thousands)20202019
Supplemental schedule of cash and cash equivalents and restricted cash
Cash and cash equivalents$367,342 $326,773 
Restricted cash49,295 42,227 
Deposits – workers’ compensation175,913 166,474 
Cash, cash equivalents and restricted cash beginning of period$592,550 $535,474 
Cash and cash equivalents$372,356 $243,439 
Restricted cash45,265 45,251 
Deposits – workers’ compensation181,634 170,032 
Cash, cash equivalents and restricted cash end of period$599,255 $458,722 
Supplemental operating lease cash flow information:
ROU assets obtained in exchange for lease obligations$18,364 $21,980 
See accompanying notes.
Insperity | 2020 Third Quarter Form 10-Q
7

FINANCIAL STATEMENTS
(Unaudited)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
For the Nine Months Ended September 30, 2020 and 2019

Common Stock IssuedAdditional Paid-In CapitalTreasury StockRetained Earnings and AOCITotal
(in thousands)SharesAmount
Balance at December 31, 201955,489 $555 $48,141 $(544,102)$499,485 $4,079 
Purchase of treasury stock, at cost—   (91,216) (91,216)
Issuance of long-term incentive awards and dividend equivalents
—  (7,088)7,898 (810) 
Stock-based compensation expense—  32,893 5,217  38,110 
Other—  652 1,565  2,217 
Dividends paid—    (46,522)(46,522)
Unrealized gain on marketable securities, net of tax
—    19 19 
Net income—    133,952 133,952 
Balance at September 30, 202055,489 $555 $74,598 $(620,638)$586,124 $40,639 
Balance at December 31, 201855,489 $555 $36,752 $(357,569)$397,938 $77,676 
Purchase of treasury stock, at cost—   (153,668) (153,668)
Issuance of long-term incentive awards and dividend equivalents
—  (7,695)8,646 (951) 
Stock-based compensation expense—  15,656 5,157  20,813 
Other—  1,688 517  2,205 
Dividends paid—    (36,777)(36,777)
Unrealized gain on marketable securities, net of tax
—    35 35 
Net income—    130,704 130,704 
Balance at September 30, 201955,489 $555 $46,401 $(496,917)$490,949 $40,988 
Insperity | 2020 Third Quarter Form 10-Q
8

FINANCIAL STATEMENTS
(Unaudited)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (Continued)
For the Three Months Ended September 30, 2020 and 2019
Common Stock IssuedAdditional Paid-In CapitalTreasury StockRetained Earnings and AOCITotal
(in thousands)SharesAmount
Balance at June 30, 202055,489 $555 $54,783 $(592,313)$581,613 $44,638 
Purchase of treasury stock, at cost—   (29,986) (29,986)
Stock-based compensation expense—  19,552 1,312  20,864 
Other—  263 349  612 
Dividends paid—    (15,448)(15,448)
Unrealized loss on marketable securities, net of tax
—    (50)(50)
Net income—    20,009 20,009 
Balance at September 30, 202055,489 $555 $74,598 $(620,638)$586,124 $40,639 
Balance at June 30, 201955,489 $555 $41,009 $(383,830)$477,155 $134,889 
Purchase of treasury stock, at cost—   (114,872) (114,872)
Stock-based compensation expense—  4,880 1,637  6,517 
Other—  512 148  660 
Dividends paid—    (12,037)(12,037)
Unrealized loss on marketable securities, net of tax—    (28)(28)
Net income—    25,859 25,859 
Balance at September 30, 201955,489 $555 $46,401 $(496,917)$490,949 $40,988 
See accompanying notes.
Insperity | 2020 Third Quarter Form 10-Q
9

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

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 SynchronizationTM 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 PremierTM 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 September 30, 2020 and our Consolidated Statements of Operations for the three and nine month periods ended September 30, 2020 and 2019, our Consolidated Statements of Cash Flows for the nine month periods ended September 30, 2020 and 2019 and our Consolidated Statements of Stockholders’ Equity for the nine month periods ended September 30, 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 exceed $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
Insperity | 2020 Third Quarter Form 10-Q
10

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 September 30, 2020, and is included in deposits - health insurance as a long-term asset on our Condensed Consolidated Balance Sheets. As of September 30, 2020, Plan Costs were less than the net premiums paid and owed to United by $32.8 million. As this amount is in excess of the agreed-upon $9.0 million surplus maintenance level, the $23.8 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 September 30, 2020 were $38.3 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 nine months of 2020 included a reduction of $1.9 million for changes in estimated run-off related to prior periods. Our benefits costs incurred in the first nine months of 2019 included a charge of $2.9 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 nine months ended September 30, 2020 and 2019, we reduced accrued workers’ compensation costs by $32.4 million and $26.0 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 0.7% and in the 2019 period was 2.0%) and are accreted over the estimated claim payment period and included as a component of direct costs in our Consolidated Statements of Operations.
Insperity | 2020 Third Quarter Form 10-Q
11

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following table provides the activity and balances related to incurred but not paid workers’ compensation claims:
Nine Months Ended September 30,
(in thousands)20202019
Beginning balance, January 1,$242,904 $229,639 
Accrued claims33,397 44,334 
Present value discount, net of accretion(500)(3,664)
Paid claims(34,289)(34,669)
Ending balance$241,512 $235,640 
Current portion of accrued claims$45,265 $45,250 
Long-term portion of accrued claims196,247 190,390 
Total accrued claims$241,512 $235,640 
The current portion of accrued workers’ compensation costs on our Condensed Consolidated Balance Sheets at September 30, 2020 includes $2.7 million of workers’ compensation administrative fees.
As of September 30, 2020 and 2019, the undiscounted accrued workers’ compensation costs were $259.4 million and $255.3 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. During the first nine months of 2020 and 2019, we received $24.8 million and $16.7 million, respectively, for the return of excess claim funds related to the workers’ compensation program, which resulted in a decrease to deposits – workers’ compensation. At September 30, 2020, we had restricted cash of $45.3 million and deposits – workers’ compensation of $181.6 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 $520.9 million and $448.1 million at September 30, 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.
Insperity | 2020 Third Quarter Form 10-Q
12

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 September 30,Nine Months Ended September 30,
(in thousands)20202019% Change20202019% Change
Northeast$278,712 $271,839 2.5 %$896,113 $853,263 5.0 %
Southeast121,439 122,992 (1.3)%379,614 373,044 1.8 %
Central182,245 180,602 0.9 %570,559 555,797 2.7 %
Southwest217,527 242,200 (10.2)%712,185 756,495 (5.9)%
West195,412 212,618 (8.1)%634,533 661,460 (4.1)%
995,335 1,030,251 (3.4)%3,193,004 3,200,059 (0.2)%
Other revenue12,485 13,137 (5.0)%37,665 39,655 (5.0)%
Total revenue$1,007,820 $1,043,388 (3.4)%$3,230,669 $3,239,714 (0.3)%
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 September 30, 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:
September 30, 2020December 31, 2019
(in thousands)Cash & Cash EquivalentsMarketable SecuritiesTotalCash & Cash EquivalentsMarketable SecuritiesTotal
Overnight holdings$314,952 $ $314,952 $349,857 $ $349,857 
Investment holdings38,867 33,994 72,861 13,218 34,728 47,946 
Cash in demand accounts28,259  28,259 36,521  36,521 
Outstanding checks(9,722) (9,722)(32,254) (32,254)
Total$372,356 $33,994 $406,350 $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 September 30, 2020 and December 31, 2019 included $147.1 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 $46.5 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
Insperity | 2020 Third Quarter Form 10-Q
13

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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:
September 30, 2020December 31, 2019
(in thousands)TotalLevel 1Level 2TotalLevel 1Level 2
Money market funds$353,819 $353,819 $ $363,075 $363,075 $ 
U.S. Treasury bills10,411 10,411  34,728 34,728  
Municipal bonds23,583  23,583    
Total$387,813 $364,230 $23,583 $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 CostGross Unrealized GainsGross Unrealized LossesEstimated Fair Value
September 30, 2020
U.S. Treasury bills$10,410 $1 $ $10,411 
Municipal bonds23,554 29  23,583 
Total$33,964 $30 $ $33,994 
December 31, 2019
U.S. Treasury bills$34,716 $13 $(1)$34,728 
Total$34,716 $13 $(1)$34,728 

As of September 30, 2020, the contractual maturities of our marketable securities were as follows:
(in thousands)Amortized CostEstimated Fair Value
Less than one year$33,964 $33,994 
One to five years  
Total$33,964 $33,994 
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 September 30, 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.
Insperity | 2020 Third Quarter Form 10-Q
14

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

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 September 30, 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 annual rate equal to 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% per year. The average interest rate for the nine month period ended September 30, 2020 was 2.52%. 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 September 30, 2020.

6.Stockholders' Equity
During the first nine months of 2020, we repurchased or withheld an aggregate of 1,336,884 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. During the nine months ended September 30, 2020, 1,186,000 shares were repurchased under the Repurchase Program. As of September 30, 2020, we were authorized to repurchase an additional 227,833 shares under the Repurchase Program.
Withheld Shares
During the nine months ended September 30, 2020, we withheld 150,884 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)20202019
First quarter$0.40 $0.30 
Second quarter0.40 0.30 
Third quarter0.40 0.30 
Insperity | 2020 Third Quarter Form 10-Q
15

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

During the nine months ended September 30, 2020 and 2019, we paid dividends totaling $46.5 million and $36.8 million, respectively.
Rights Plan
On May 21, 2020, the Board declared a dividend of one right (“Right”) for each outstanding share of common stock to common stockholders of record at the close of business on June 1, 2020 (the “Rights Plan”). Each Right, if and when it becomes exercisable, entitles the registered holder to purchase from us one unit consisting of one one-hundredth of a share of Series A Junior Participating Preferred Stock, par value $0.01 per share. Initially, the Rights are attached to all outstanding shares of our common stock. The Rights are not currently exercisable and the Rights Plan will expire at the close of business on May 20, 2021, unless the Rights are earlier redeemed or exchanged by us.

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.
Insperity | 2020 Third Quarter Form 10-Q
16

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 September 30,Nine Months Ended September 30,
(in thousands)2020201920202019
Net income$20,009 $25,859 $133,952 $130,704 
Less distributed and undistributed earnings allocated to participating securities
(104)(284)(792)(1,546)
Net income allocated to common shares
$19,905 $25,575 $133,160 $129,158 
Weighted average common shares outstanding38,507 40,168 38,625 40,481 
Incremental shares from assumed time-vested and performance-based RSU awards and conversions of common stock options
234 149 193 143 
Adjusted weighted average common shares outstanding38,741 40,317 38,818 40,624 

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 (the “Co-Defendant”) 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 the plaintiffs’ request for a jury trial and set a bench trial, which was held from March 2, 2020 to March 13, 2020. At trial, the plaintiffs alleged damages up to approximately $146 million against all defendants. All parties filed proposed findings of fact and conclusions of law on June 15, 2020. On September 18, 2020, the plaintiffs and Co-Defendant informed the court that they reached an agreement in principle to settle the entire case, including a full and final release of all claims against Insperity. Insperity did not participate in the settlement discussions and will make no financial contribution to the settlement. In connection with the settlement, the plaintiffs and Co-Defendant filed a motion to extend the class period to March 31, 2019, which the court granted. The court has also granted preliminary approval of the settlement and has set the final approval hearing on March 5, 2021. As a result of the uncertainty regarding the outcome of this matter and the subsequent settlement agreement that, if approved by the court, will end the case with no financial contribution from Insperity, no provision has been made in the accompanying Consolidated Financial Statements.
Securities Class Action Lawsuit
In July 2020, a federal securities class action was filed against us and certain of our officers in the United States District Court for the Southern District of New York. The name of the case is Building Trades Pension Fund of Western Pennsylvania v. Insperity, Inc., et al., Case No. 1:20-cv-05635-NRB. On October 23, 2020, the court issued an order appointing Oakland County Employees’ Retirement System and Oakland County Voluntary Employees’ Beneficiary Association Trust as lead plaintiff. The complaint alleges that we made materially false and misleading statements regarding our business and operations in violation of the federal securities laws and seeks unspecified damages, the payment of reasonable attorneys’ fees, expert fees and other costs, and such other relief that may be deemed proper. We believe the allegations in the action are without merit, and we intend to vigorously defend this litigation. As a result of uncertainty regarding the outcome of this matter, no provision has been made in the accompanying Consolidated Financial Statements.
Insperity | 2020 Third Quarter Form 10-Q
17

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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.
Insperity | 2020 Third Quarter Form 10-Q
18

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2019, as well as our Consolidated Financial Statements and notes thereto included in this Quarterly Report on Form 10-Q.
Executive Summary
Overview
Insperity, Inc. (“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 SynchronizationTM 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 PremierTM platform.
COVID-19 Pandemic
The effects of the COVID-19 pandemic, including actions taken by businesses and governments, have resulted in a significant reduction in U.S. economic activity. As the duration of the pandemic and such economic impacts remain uncertain, we have planned for a range of scenarios and have modified certain business and workforce practices. To conform to government restrictions and best practices, we have taken steps designed to keep our staff safe while continuing to serve clients, including implementing remote working for all non-essential employees and providing extra safety measures at corporate facilities. To serve our clients, we have instituted a number of service offerings and developed COVID-19 resources to assist clients with obtaining government provided tax credits, tax deferrals, loans and loan forgiveness and to provide guidance to assist clients with addressing the challenges faced by employers as a result of the pandemic. These service offerings and guidance to assist clients during the pandemic included additional benefits support, remote workforce transition, monitoring and educating on regulatory changes, return to workforce and workplace safety.
The COVID-19 pandemic did not have a significant impact to our first quarter 2020 financial results due to the increased spread of, and related government and business responses to, the COVID-19 pandemic not occurring until late in the quarter. However, towards the end of the first quarter, clients began layoffs and temporary leaves of absence of worksite employees (“WSEEs”), and this trend continued into the second quarter and resulted in a 1.8% decline in year-over-year average number of paid WSEEs per month in the second quarter. In the third quarter of 2020, the number of WSEEs returning to work as well as new hires exceeded layoffs, resulting in a 1.7% sequential increase and a 3.8% year-over-year decline in the average number of paid WSEEs per month. We expect the average number of paid WSEEs per month to decline between 2.1% and 3.0% in the fourth quarter of 2020 as compared to the fourth quarter of 2019, which equates to the average number of paid worksite employees per month growing 2% to 3% sequentially from the third quarter of 2020. We expect overall reduced employment levels to have a negative impact on our financial results for at least the remainder of 2020 as compared to 2019.
We experienced a 10.7% decrease in the year-over-year benefits costs per covered employee during the second quarter of 2020 and a 1.1% increase in the year-over-year benefits costs per covered employee during the third quarter of 2020. The third quarter 2020 increase in benefits costs per covered employee over the preceding second quarter of 2020 was due primarily to an increase in non-essential claims as a result of higher utilization and fewer deferrals or cancellations associated with the COVID-19 pandemic. We currently expect to experience higher costs related to COVID-19 and certain non-essential elective healthcare procedures during the remainder of 2020 and possibly into 2021 that had been deferred in response to COVID-19 governmental requirements or guidance related to shelter in place and similar orders. As a result, we expect that our healthcare claim costs will not be reflective of our historical quarterly claim cost trends. In addition, the COVID-19 pandemic has not had a material impact on our workers’ compensation cost estimate; however, the ultimate impact of COVID-19 on our workers’ compensation program remains uncertain. As the impact of the COVID-19 pandemic emerges, such impact, if any, on our workers’ compensation program will be reflected in future reporting periods.
Insperity | 2020 Third Quarter Form 10-Q
19

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The extent to which our future results are affected by the COVID-19 pandemic will depend on various factors and consequences beyond our control, such as the scope, duration and magnitude of the pandemic, actions by businesses and governments in response to the pandemic, including programs designed to assist small and medium-sized businesses with the economic impact of the pandemic; and the speed and effectiveness of responses to combat the virus, including the development and availability of therapeutics and vaccines. See Part II, Item 1A. “Risk Factors” for additional information.
2020 Highlights
Third Quarter 2020 Compared to Third Quarter 2019
Average number of WSEEs paid per month decreased 3.8%
Net income and diluted earnings per share (“diluted EPS”) decreased 22.6% and 19.0%, to $20.0 million and $0.51, respectively
Adjusted EPS increased 21.3% to $0.91
Adjusted EBITDA increased 12.5% to $57.6 million
First Nine Months 2020 Compared to First Nine Months 2019
Average number of WSEEs paid per month decreased 0.1%
Net income and diluted EPS increased 2.5% and 7.9% to $134.0 million and $3.43, respectively
Adjusted EPS increased 16.2% to $4.15
Adjusted EBITDA increased 19.8% to $250.8 million
Please read “Non-GAAP Financial Measures” for a reconciliation of adjusted EBITDA and adjusted EPS to their most directly comparable financial measures calculated and presented in accordance with accounting principles generally accepted in the United States (“GAAP”).
Insperity | 2020 Third Quarter Form 10-Q
20

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Key Financial and Statistical Data
(in thousands, except per share, WSEE and statistical data)
Three Months Ended September 30,Nine Months Ended September 30,
20202019% Change20202019% Change
Financial data:
Revenues
$1,007,820 $1,043,388 (3.4)%$3,230,669 $3,239,714 (0.3)%
Gross profit185,033 170,546 8.5 %639,304 570,998 12.0 %
Operating expenses156,261 135,813 15.1 %452,324 412,084 9.8 %
Operating income28,772 34,733 (17.2)%186,980 158,914 17.7 %
Other income (expense)(1,628)452 — (3,961)3,179 — 
Net income20,009 25,859 (22.6)%133,952 130,704 2.5 %
Diluted EPS
0.51 0.63 (19.0)%3.43 3.18 7.9 %
Non-GAAP financial measures(1):
Adjusted net income$35,389 $30,648 15.5 %$161,928 $146,699 10.4 %
Adjusted EBITDA57,558 51,154 12.5 %250,770 209,277 19.8 %
Adjusted EPS
0.91 0.75 21.3 %4.15 3.57 16.2 %
Average WSEEs paid231,750 240,939 (3.8)%232,553 232,825 (0.1)%
Statistical data (per WSEE per month):
Revenues(2)
$1,450 $1,444 0.4 %$1,544 $1,546 (0.1)%
Gross profit266 236 12.7 %305 272 12.1 %
Operating expenses
225 188 19.7 %216 197 9.6 %
Operating income
41 48 (14.6)%89 76 17.1 %
Net income29 36 (19.4)%64 62 3.2 %
 ____________________________________
(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:
Three Months Ended September 30,Nine Months Ended September 30,
(per WSEE per month)2020201920202019
Gross billings$9,441 $9,070 $9,726 $9,451 
Less: WSEE payroll cost7,991 7,626 8,182 7,905 
Revenues$1,450 $1,444 $1,544 $1,546 

New Accounting Pronouncements
Please read Note 2 to the Consolidated Financial Statements, "Accounting Policies – Recently Adopted Accounting Standards," for new accounting pronouncements information.
Results of Operations
Key Operating Metrics
We monitor certain key metrics to measure our performance, including:
WSEEs
Insperity | 2020 Third Quarter Form 10-Q
21

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Adjusted EBITDA
Adjusted EPS
Our growth in the number of WSEEs paid is affected by three primary sources: new client sales, client retention and the net change in existing clients through WSEE new hires and layoffs.

During the third quarter of 2020 (“Q3 2020”), WSEEs paid declined 3.8% compared to the third quarter of 2019 (“Q3 2019”). The net gain (loss) in our client base improved over Q3 2019. In addition, the number of WSEEs paid from new client sales was 92% of Q3 2019 paid from new client sales and client retention averaged 99% in 2020 and 2019.

During the first nine months of 2020 (“YTD 2020”), WSEEs paid declined 0.1% compared to the first nine months of 2019 (“YTD 2019”). The number of WSEEs paid from new client sales was 96% of YTD 2019. While the net gain (loss) in our client base declined compared to YTD 2019, due primarily to layoffs and furloughs of WSEEs by our clients resulting from the effect of the on-going COVID-19 pandemic, we have seen certain clients make significant hiring of worksite employees while other clients have experienced significant layoffs. Average client retention declined slightly compared to YTD 2019.

Average WSEEs Paid and
Year-over-Year Growth Percentage
nsp-20200930_g2.jpg
Insperity | 2020 Third Quarter Form 10-Q
22

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Adjusted EBITDA and
Year-over-Year Growth Percentage
(in thousands)
nsp-20200930_g3.jpg
Adjusted EPS and
Year-over-Year Growth Percentage
(amounts per share)
nsp-20200930_g4.jpg
Revenues
Our PEO HR Outsourcing solutions revenues are primarily derived from our gross billings, which are based on (1) the payroll cost of our WSEEs and (2) a markup computed as a percentage of the payroll cost.
Our revenues are primarily dependent on the number of clients enrolled, the resulting number of WSEEs paid each period and the number of WSEEs enrolled in our benefit plans. Because our total markup is computed as a percentage of payroll cost, certain revenues are also affected by the payroll cost of WSEEs, which may fluctuate based on the composition of the WSEE base, inflationary effects on wage levels and differences in the local economies of our markets.
Insperity | 2020 Third Quarter Form 10-Q
23

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Revenue and
Year-over-Year Growth Percentage
(in thousands)
nsp-20200930_g5.jpg
Third Quarter 2020 Compared to Third Quarter 2019
Our revenues for Q3 2020 were $1.0 billion, a decrease of 3.4%, primarily due to the following:
Average WSEEs paid decreased 3.8%.
Revenues per WSEE per month increased 0.4%, or $6, primarily due to higher average pricing partially offset by $40.2 million in FICA deferral elections by clients and credits pursuant to the CARES Act and the Families First Coronavirus Response Act, which also reduced our direct costs and therefore has no net effect on our gross profit.
First Nine Months 2020 Compared to First Nine Months 2019
Our revenues for YTD 2020 were $3.2 billion, a decrease of 0.3%, primarily due to the following:
Average WSEEs paid decreased 0.1%.
Revenues per WSEE per month decreased 0.1%, or $2, primarily due to higher average pricing, which was partially offset by $85.0 million in FICA deferral elections by clients and credits pursuant to the CARES Act and the Families First Coronavirus Response Act, which also reduced our direct costs and therefore has no net effect on our gross profit. In addition, during the second quarter of 2020, we accrued $11.6 million of client comprehensive service fee credits applied generally on a WSEE basis across our active client base to assist clients in addressing the unprecedented economic impact of the COVID-19 pandemic.
Insperity | 2020 Third Quarter Form 10-Q
24

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
We provide our PEO HR Outsourcing solutions to small and medium-sized businesses in strategically selected markets throughout the United States. Our PEO HR Outsourcing solutions revenue distribution by region follows:
PEO HR Outsourcing Solutions Revenue by Region
(in thousands)
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The percentage of total PEO HR Outsourcing solutions revenue in our significant markets includes the following:
Significant Markets
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Gross Profit
In determining the pricing of the markup component of our gross billings, we take into consideration our estimates of the costs directly associated with our WSEEs, including payroll taxes, benefits and workers’ compensation costs, plus an acceptable gross profit margin. As a result, our operating results are significantly impacted by our ability to accurately estimate, control and manage our direct costs relative to the revenues derived from the markup component of our gross billings.
Our gross profit per WSEE is primarily determined by our ability to accurately estimate and control direct costs and our ability to incorporate changes in these costs into the gross billings charged to PEO HR Outsourcing solutions
Insperity | 2020 Third Quarter Form 10-Q
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
clients, which are subject to pricing arrangements that are typically renewed annually. We use gross profit per WSEE per month as our principal measurement of relative performance at the gross profit level.
Gross Profit and
Year-over-Year Growth Percentage
(in thousands)
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Gross Profit per WSEE per Month and
Year-over-Year Growth Percentage
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Third Quarter 2020 Compared to Third Quarter 2019
Gross profit for Q3 2020 increased 8.5% to $185.0 million compared to $170.5 million in Q3 2019. Gross profit per WSEE per month for Q3 2020 increased $30 to $266 compared to $236 in Q3 2019 due primarily to the relative changes in higher pricing and lower direct costs as discussed below.
Our pricing objectives attempt to achieve a level of revenue per WSEE that matches or exceeds changes in primary direct costs and operating expenses. Our revenues and direct costs per WSEE per month increased $6 and decreased $24, respectively, due to higher average pricing, which was partially offset by client FICA deferral elections pursuant to the CARES Act in Q3 2020 and changes in the primary direct cost components, respectively.
The net decrease in costs between Q3 2020 and Q3 2019 attributable to the changes in cost estimates for benefits and workers’ compensation totaled $18.6 million as discussed below. The primary direct cost components changed as follows:
Benefits costs
Insperity | 2020 Third Quarter Form 10-Q
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The cost of group health insurance and related employee benefits increased $27 per WSEE per month and increased 1.1% on a cost per covered employee basis.
The percentage of WSEEs covered under our health insurance plans was 67.9% in Q3 2020 compared to 66.0% in Q3 2019.
Reported results include changes in estimated claims run-off related to prior periods, which was a decrease in costs of $7.7 million, or $11 per WSEE per month, in Q3 2020 compared to an increase in costs of $7.0 million, or $10 per WSEE per month, in Q3 2019.
Please read Note 2 to the Consolidated Financial Statements, “Accounting Policies – Health Insurance Costs,” for a discussion of our accounting for health insurance costs.
Workers’ compensation costs
Our continued discipline around our client selection, safety and claims management contributed to the decrease in our cost per WSEE and, as a result, has allowed for claims within our policy periods to be closed out at amounts below our original cost estimates.
Workers’ compensation costs decreased 30.8%, or $9 per WSEE per month, in Q3 2020 compared to Q3 2019.
As a percentage of non-bonus payroll cost, workers’ compensation costs in Q3 2020 were 0.30% compared to 0.43% in Q3 2019.
We recorded a reduction in workers’ compensation costs of $11.4 million, or 0.22% of non-bonus payroll costs, in Q3 2020 compared to a reduction of $7.5 million, or 0.15% of non-bonus payroll costs, in Q3 2019, primarily as a result of closing out claims at lower than expected costs.
Please read Note 2 to the Consolidated Financial Statements, “Accounting Policies – Workers’ Compensation Costs,” for a discussion of our accounting for workers’ compensation costs.
Payroll tax costs
Payroll taxes decreased 12.7% on an 0.8% increase in payroll costs, or $44 per WSEE per month, primarily due to $40.2 million of FICA deferral elections by clients pursuant to the CARES Act. In addition, Internal Revenue Service tax reporting changes in 2020 eliminated PEO reporting of payroll taxes for self-employed owners.
Payroll taxes as a percentage of payroll costs decreased to 5.4% in Q3 2020 compared to 6.2% in Q3 2019.
First Nine Months 2020 Compared to First Nine Months 2019
Gross profit for YTD 2020 increased 12.0% to $639.3 million compared to $571.0 million in YTD 2019. Gross profit per WSEE per month for YTD 2020 increased $33 to $305 compared to $272 in YTD 2019 due primarily to the relative changes in higher pricing and lower direct costs as discussed below.
Our pricing objectives attempt to achieve a level of revenue per WSEE that matches or exceeds changes in primary direct costs and operating expenses. Our revenues and direct costs per WSEE per month decreased $2 and $35, respectively, due to higher average pricing, which was offset by client FICA deferral elections pursuant to the CARES Act in YTD 2020 and changes in the primary direct cost components, respectively.
The net decrease in costs between YTD 2020 and YTD 2019 attributable to the changes in cost estimates for benefits and workers’ compensation totaled $11.2 million as discussed below. The primary direct cost components changed as follows:
Benefits costs
The cost of group health insurance and related employee benefits increased $3 per WSEE per month and decreased 1.5% on a cost per covered employee basis due primarily to a decrease in claims as a result of lower utilization and the deferral of nonessential healthcare procedures, primarily in the second quarter of 2020, in response to COVID-19 government requirements or guidance.
Insperity | 2020 Third Quarter Form 10-Q
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The percentage of WSEEs covered under our health insurance plans was 68.0% in YTD 2020 compared to 66.6% in YTD 2019.
Reported results include changes in estimated claims run-off related to prior periods which was a decrease in costs of $1.9 million, or $1 per WSEE per month, in YTD 2020 compared to an increase in costs of $2.9 million, or $2 per WSEE per month, in YTD 2019.
Please read Note 2 to the Consolidated Financial Statements, “Accounting Policies – Health Insurance Costs,” for a discussion of our accounting for health insurance costs.
Workers’ compensation costs
Our continued discipline around our client selection, safety and claims management contributed to the decrease in our cost per WSEE and, as a result, has allowed for claims within our policy periods to be closed out at amounts below our original cost estimates.
Workers’ compensation costs decreased 15.4%, or $4 on a per WSEE per month basis, in YTD 2020 compared to YTD 2019.
As a percentage of non-bonus payroll cost, workers’ compensation costs in YTD 2020 were 0.33% compared to 0.40% in YTD 2019.
We recorded a reduction in workers’ compensation costs of $32.4 million, or 0.21% of non-bonus payroll costs, in YTD 2020 compared to a reduction of $26.0 million, or 0.18% of non-bonus payroll costs, in YTD 2019, primarily as a result of closing out claims at lower than expected costs.
Please read Note 2 to the Consolidated Financial Statements, “Accounting Policies – Workers’ Compensation Costs,” for a discussion of our accounting for workers’ compensation costs.
Payroll tax costs
Payroll taxes decreased 6.3% on a 3.4% increase in payroll costs, or $35 per WSEE per month, primarily due to $85.0 million of FICA deferral elections by clients pursuant to the CARES Act. In addition, Internal Revenue Service tax reporting changes in 2020 eliminated PEO reporting of payroll taxes for self-employed owners.
Payroll taxes as a percentage of payroll costs decreased to 6.4% in YTD 2020 compared to 7.1% in YTD 2019.
Operating Expenses
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 other sales personnel, including 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
Insperity | 2020 Third Quarter Form 10-Q
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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.
Third Quarter 2020 Compared to Third Quarter 2019
The following table presents certain information related to our operating expenses:
Three Months Ended September 30,
$WSEE
(in thousands, except per WSEE)20202019% Change20202019% Change
Salaries$89,429 $79,264 12.8 %$129 $110 17.3 %
Stock-based compensation20,864 6,517 220.1 %30 233.3 %
Commissions7,722 8,034 (3.9)%11 11 — 
Advertising4,781 4,895 (2.3)%— 
General and administrative25,646 29,773 (13.9)%37 41 (9.8)%
Depreciation and amortization7,819 7,330 6.7 %11 10 10.0 %
Total operating expenses$156,261 $135,813 15.1 %$225 $188 19.7 %
Operating expenses for Q3 2020 increased 15.1% to $156.3 million compared to $135.8 million in Q3 2019. Operating expenses per WSEE per month for Q3 2020 increased 19.7% to $225 compared to $188 in Q3 2019.
Salaries of corporate and sales staff for Q3 2020 increased 12.8% to $89.4 million, or $19 per WSEE per month, compared to Q3 2019. This increase was primarily due to a 2.3% increase in corporate headcount, including a 6.8% increase in total BPAs in Q3 2020 compared to Q3 2019 and higher incentive compensation accruals in Q3 2020 related to better than expected YTD 2020 operating results compared to lower than expected YTD 2019 operating results in Q3 2019.
Stock based compensation expense for Q3 2020 increased 220.1% to $20.9 million, or $21 per WSEE per month, compared to Q3 2019. The increase was primarily due to an increase in the number of stock awards anticipated to be earned related to performance-based awards granted under our short-term and long-term incentive plans based on our higher than expected year-to-date operating results in Q3 2020 compared to lower than expected year-to-date results in Q3 2019. In addition, Q3 2020 contains the acceleration of expense for employees who meet the retirement eligibility requirements for continued vesting. Please read Note 7 to the Consolidated Financial Statements, “Incentive Plans,” for additional information.
Commissions expense for Q3 2020 decreased 3.9% to $7.7 million, but remained flat on a per WSEE per month basis, compared to Q3 2019. The decrease was primarily due to reductions in commissions associated with PEO HR Outsourcing solutions and our other business performance solutions offerings, partially offset by an increase in the amount of sales channel referral fees paid during Q3 2020.
Advertising expense for Q3 2020 decreased 2.3% to $4.8 million, but remained flat on a per WSEE per month basis, compared to Q3 2019. The decrease was primarily due to decreases in trade shows and events due to COVID-19, partially offset by an increase in internet advertising.
General and administrative expenses for Q3 2020 decreased 13.9% to $25.6 million, or $4 per WSEE per month, compared to Q3 2019. The decrease was primarily due to reductions in travel and training costs in response to the COVID-19 pandemic, partially offset by increases in technology licensing costs, corporate insurance and rent.
Depreciation and amortization expense for Q3 2020 increased 6.7% to $7.8 million, or $1 per WSEE per month, compared to Q3 2019. The increase was primarily due to increased capital expenditures related to software development costs and sales office expansions.
Insperity | 2020 Third Quarter Form 10-Q
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
First Nine Months 2020 Compared to First Nine Months 2019
Nine Months Ended September 30,
$WSEE
(in thousands, except per WSEE)20202019% Change20202019% Change
Salaries$266,640 $237,340 12.3 %$127 $113 12.4 %
Stock-based compensation38,110 20,813 83.1 %18 10 80.0 %
Commissions23,657 22,727 4.1 %11 11 — 
Advertising15,334 17,474 (12.2)%(12.5)%
General and administrative85,254 92,801 (8.1)%42 45 (6.7)%
Depreciation and amortization23,329 20,929 11.5 %11 10 10.0 %
Total operating expenses$452,324 $412,084 9.8 %$216 $197 9.6 %
Operating expenses for YTD 2020 increased 9.8% to $452.3 million compared to $412.1 million in YTD 2019. Operating expenses per WSEE per month for YTD 2020 increased 9.6% to $216 compared to $197 in YTD 2019.
Salaries of corporate and sales staff for YTD 2020 increased 12.3% to $266.6 million, or $14 per WSEE per month, compared to YTD 2019. This increase was primarily due to a 5.0% increase in corporate headcount, including an 10.7% increase in total BPAs in YTD 2020 compared to YTD 2019 and higher incentive compensation accruals in YTD 2020 related to better than expected YTD 2020 operating results compared to lower than expected YTD 2019 operating results in Q3 2019.
Stock based compensation expense for YTD 2020 increased 83.1% to $38.1 million or $8 per WSEE per month, compared to YTD 2019. The increase was primarily due to an increase in the number of stock awards anticipated to be earned related to performance-based awards granted under our short-term and long-term incentive plans based on our higher than expected YTD 2020 operating results compared to lower than expected YTD 2019 operating results. In addition, YTD 2020 contains the acceleration of expense for employees who meet the retirement eligibility requirements for continued vesting. Please read Note 7 to the Consolidated Financial Statements, “Incentive Plans,” for additional information.
Commissions expense for YTD 2020 increased 4.