TNET - NYSE

Good morning and welcome to the TriNet Third Quarter 2024 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions]. Please note this event is being recorded. I would now like to turn the conference over to Alex Bauer, head of investor relations. Please go ahead.

Thank you, operator. Good morning. My name is Alex Bauer and I'm TriNet's Head of Investor Relations. Thank you for joining us and welcome to TriNet's 2024 third quarter conference call. I'm joined today by our President and CEO, Mike Simonds, and our CFO, Kelly Tuminelli. Before we begin, I would like to address our use of forward-looking statements and non-GAAP financial measures. Please note that today's discussion will include our 2024 Fourth Quarter and full-year financial outlook and other statements that are not historical in nature or predictive in nature or depend upon or refer to future events or conditions, such as our expectations, estimates, predictions, strategies, beliefs, or other statements that might be considered forward-looking. These forward-looking statements are based on management's current expectations and assumptions and are inherently subject to risks, uncertainties, and changes in circumstances that are difficult to predict and that may cause actual results to differ materially from statements being made today or in the future. Except as may be required by law, we do not undertake to update any of these statements in light of new information, future events, or otherwise. We encourage you to review our most recent public filings at the SEC, including our 10-K and 10-Q filings for a more detailed discussion of the risks, uncertainties, and changes in circumstances that may affect our future results or the market price of our stock. In addition, our discussion today will include non-GAAP financial measures, including our forward-looking guidance for adjusted net income per diluted share. For reconciliations of our non-GAAP financial measures to our GAAP financial results, please see our earnings release, 10-Q filings, or 10-K filing, which are available on our website or through the SEC website. With that, I'll turn the call over to Mike.

Good morning. Thank you, Alex, and my thanks to all of you for joining us on today's call. While there are a number of very positive things happening across our business, increases in healthcare costs adversely impacted our overall financial performance this quarter, and so I'd like to start my comments there. As context, throughout 2024, the market has experienced a significant and broad-based increase in healthcare costs. In looking at our own experience, similar to what many in the market are reporting, the overall number of claims is largely consistent with our expectations. However, the average cost per claimant driven by severity and overall inflation is higher than what we assumed in our pricing. Over the last several months, we've taken a number of actions to both improve our results in the short term, and importantly, enhance our capabilities moving forward. First, earlier this year, we broke out the Insurance Services Group into a singularly focused team reporting to me and brought in a strong and experienced leader in Tim Nimmer to head it out. Tim's background includes Chief Actuary and Head of Pricing and Underwriting roles at two of the largest global firms in healthcare. Already, Tim has strengthened our insurance services team with the addition of new actuarial talent. Second, we consolidated our data and analytics from around TriNet into a single team to ensure our performance data is strong and consistent throughout the customer lifecycle, and that our new business and renewal pricing processes are disciplined and supported by data that is high quality and visible. Third, with strong talent, improved data, and a more disciplined process in place, we thoughtfully increased our healthcare pricing over the past several months, assuming a continued elevated trend in 2025. Utilizing our new rate level, we released our October 1st renewals for the largest cohort of our customers, approximately 39% of our annualized healthcare fees. With strong execution across our insurance services, customer relationship, and service delivery teams, I'm pleased to say that the renewal went very well. We achieved the targeted double digit increases with strong retention of our customers. In fact, we are now forecasting record customer retention for full year 2024. We are currently engaged on our January 1st renewals, which represent another 29% of our healthcare fees. Again, pricing here will reflect current elevated healthcare costs with no relief assumed in 2025 to trend. Given the fact, we will have repriced more than two-thirds of our healthcare fee based by the start of next year. And assuming 2025 healthcare costs continue to grow at the current elevated rate, we expect our 2025 insurance cost ratio to stabilize at or near our current full year 2024 outlook. Looking out to the mid and long term, I believe our accelerated investment in risk management, talent, tools, and processes will reduce the volatility of our insurance cost ratio while maximizing profitable growth. We believe the earnings power of our business with a stable annual insurance cost ratio in our long term range of 87% to 90% is considerable. And this management team is committed to achieving it, even if it means trading off customer and WSE growth in the short term. Turning now to a discussion of results outside of our ICR, we should start with the broader environment for SMBs in the verticals we target. Slower economic growth, higher interest rates, and a generally cautious outlook resulted in a third quarter of no net hiring amongst our customer base. While the headline jobs reports have been generally positive from the BLS over the last year, our experience has differed materially. Growth in several sectors, including government, construction, and healthcare are fueling aggregate headlines while our core verticals of technology, life sciences, financial services, and other professional services have been muted. It's worth noting that the long term average CIE in our targeted verticals is 8% to 12% versus flat here in 3Q. Given that CIE growth comes with very low acquisition and incremental service cost, the impact of historically low CIE is meaningful to both top and bottom line. Again, like with a stable ICR in our targeted range, even a partial reversion over time to our historical CIE represents significant earnings upside in future periods and is another reason we believe our business is such a good one. However, given we find ourselves in this low growth environment, we are exercising particular discipline with respect to our expenditures. Expenses declined 1% in the quarter as we focused on process and technology improvements. I'm quite encouraged by the momentum we're building on these fronts, making investments that drive efficiency while improving the customer experience. And frankly, we have much more potential to improve, creating value for customers, colleagues, and shareholders. Recognizing this potential will require making clear and disciplined choices, and our team continues to work through these methodically. And while there is more we will share with fourth quarter results, a few things are clear. First, our core PEO business operates in a very attractive market, uniquely blending services and strong technology to deliver exceptional value to SMBs. You can expect us to sharpen our focus on our core business, playing only where we believe we can win a leading share of our customers. Second, the current healthcare environment is a short-term headwind, but we firmly believe that the growing cost and complexity of employee benefits only strengthens demand for what we do. Look for us to bet on benefits, investing to extend our risk management, offering, and customer experience. I firmly believe we can deliver greater predictability in ICR while creating separation from PEO competitors who see insurance as simply a pass-through. Benefits is our targeted SMB customers' number one concern, and we will address it in a differentiated way. Finally, we have the opportunity to accelerate our investment in technology and talent to improve our platform and service delivery while growing overall expenses at a considerably slower rate than revenue. Like I said, there's considerable work still to do, but I am excited by the engagement of our broader leadership team and look forward to updating you on the outcome of our work on our 4Q earnings call. In summary, we are taking the challenge of healthcare cost trend head-on, both through our pricing and risk management actions. We're managing our expenses aggressively in the current low-growth environment within our customer base. And importantly, we have our eyes on the future and the steps we will take to create a more focused, more differentiated, more efficient company capable of sustainable, profitable growth. With that, I'll pass the call to Kelly for her financial review. Kelly?

Thank you, Mike. Our third quarter results reflect a continuation of many of the trends we've experienced in 2024. We've accelerated actions across our business in response to this challenging environment. In doing so, we're leveraging the strength of our business model. We adjusted pricing over the last several months and delivered sales roughly in line with our prior year, which were up 40% over the levels achieved in Q3, 2022. We passed through this revised pricing to the largest cohort of our customer base on October 1st. And even so, we're now forecasting record retention. Unfortunately, we saw no meaningful contribution from customer hiring, and yet we delivered revenue in line with the lower end of our guidance range. We are operating in one of the most challenging health cost environments in years as provider costs, claims, severity, and pharmaceutical costs all accelerated versus recent trends and our historical experience, which outpaced our 2023 and early 2024 pricing. As a result of these trends, our insurance cost ratio for the third quarter was towards the higher end of our ICR range and our full year forecast was also adjusted to reflect continuing higher costs. Given our pricing actions, our initial view on 2025 reflects a stabilizing insurance cost ratio similar to our current full year expectation for 2024. We will refine this estimate as we get through our peak selling and renewal season. We exercised prudent expense management and saw our expenses decline year-over-year. We are actively managing our resources across the business, balancing cost savings with reinvestment in key areas. We retain the flexibility to reinvest our business and return capital to shareholders. To sum up the quarter, we took expedient action to address elevated health cost trends and are successfully passing through appropriate rate increases and are still on track for record retention for the year. Now let's turn to our third quarter financial performance in more detail. In this quarter, total revenues grew 1%. We finished the third quarter with approximately 356,000 worksite employees, up 6% year-over-year and approximately 334,000 co-employed WSEs down 1% year-over-year. In the quarter, client retention was strong and outperformed our forecast as our investments in customer service continue to pay off. Retention is now on pace to exceed our best historical annual retention rate. I'm particularly pleased with this given higher benefit renewals being passed through to help offset the higher claims experience. Consistent with last quarter, sales were again flat compared to the prior year. This was a positive outcome and reflected a significant increase over 2022 levels. Finally, CIE or customer hiring was just barely positive in the quarter. The modest positive CIE experienced in July and August was almost completely offset by workforce reductions in September with each of our verticals declining during the month of September. Now let's drill down a little. Our professional service revenue was flat to our prior year. Last year, we benefited from a one-time item related to a payment acceleration and cessation of a broker relationship on our HRS platform. Without that item, our growth would have been 2%. Insurance revenue grew 2% year-over-year. Consistent with our first half trends, healthcare participation rates within our co-employed WSE base were slightly lower and were partially offset by annual inflationary rate increases. Insurance costs grew 9% year-over-year. Insurance cost growth again reflected higher healthcare and pharmacy costs. Taken all together, this brought our insurance cost ratio to 90% in line with the bottom half of third quarter guidance range. Now let's turn to operating expenses, an area we've been very focused on and quite a bright spot for our company. We continued managing the business in a prudent and disciplined fashion, resulting in a 1% year-over-year decline in operating expenses. We are proactively reducing our back office costs while making targeted investments in growth and automation. We believe robust expense management and prioritization will be critical to free up resources to reinvest in our business while delivering strong margins and attractive cash flows. Interest income on operating cash and investments offset our third quarter interest expense. In the quarter, our average cash balances were lower year-over-year, in part due to our cumulative stock repurchase as well as dividend payments. Taking this all together, we reported $0.89 in GAAP earnings per diluted share and $1.17 of adjusted net income per diluted share, both within but below the midpoint of our guidance ranges. Regarding cash and capital, we had another solid quarter of cash generation to support our business and capital allocation. In the quarter, we delivered $109 million of adjusted EBITDA. We also generated $213 million of corporate operating cash flows year to-date through the end of the quarter. By the end of next week, we will have returned $191 million to investors so far this year. In the third quarter, we repurchased 200,000 shares for a year to-date total of approximately 1.5 million shares. And by the end of October, we expect to have paid $37 million in dividends. Our capital return priorities remain unchanged. As we generate cash throughout the year, we will continue to deliver value to our shareholders by investing in our business for growth and using our cash flows to fund dividends and share repurchases in line with our financial policy. Now let's turn to our fourth quarter and full year outlook. For the fourth quarter, we expect total revenues to be down 1% to up 2% and professional service revenues to be down 8% to down 5%. Our underlying assumptions in support of our revenue guidance include our expectation for modest decline in new sales, continued strong customer retention and a limited contribution from CIE. Turning to our insurance cost ratio or ICR, for the fourth quarter, we are forecasting an ICR of 96.5% to 93.5%. Our fourth quarter ICR performance is our seasonally highest quarter each year. Historically, we see a sequential Q3 to Q4 step up in ICR of anywhere from two to five points. One key driver behind this step up is the annual reset of our pooling limit deductibles, which occurred on October 1st. Effective 10/1 [ph], our pooling coverage resets for claims that had previously hit the $500,000 per member cap for our enrolled population. In the fourth quarter, we are back on risk for any of those claims that are continuing. This results in a forecasted GAAP net income per diluted share in the range of negative $0.19 to positive $0.31 and an adjusted net income per diluted share in the range of $0.06 to $0.57. Turning to our full year guidance, given our third quarter actual performance and our forecasted fourth quarter performance, we're lowering and tightening our full year guidance. For revenues, given our current projected volumes, our range reflects growth of 1% to 2% for the total revenues and flat to up 1% for professional service revenues. Given our fourth quarter forecast for insurance cost performance, we are tightening and raising our insurance cost ratio forecast to 90.3% to 89.6%. With respect to our earnings guidance, we are bracketing our full year guidance around the previous bottom end of our range, reflecting the impact from our revised insurance cost ratio forecast offset by the expense efficiencies we have been focusing on. We now expect GAAP net income per diluted share in the range of $3.70 to $4.20 and adjusted net income per diluted share in the range of $4.95 to $5.45. So in summary, we are operating in a difficult health cost environment and are reacting quickly. By leveraging our team and improved processes, we are pricing new business and our renewals to appropriately reflect the current and expected health cost environment. As a result of the actions we're taking and have already taken, our initial view on our 2025 ICR is similar to 2024. Importantly, even as we pass through pricing reflective of the current environment, our customers are choosing to stay with us in record numbers. We remain prudent managers of our shareholder capital, keeping expense growth low while investing in our business and returning capital to shareholders. With that, let's open up the call for questions. Operator?

We will now begin the question and answer session. [Operator Instructions] The first question comes from Andrew Berkowitz with JPMorgan. Please go ahead.

Hey, good morning, everyone. I wanted to ask a question. Mike, you made a comment in the call about, commitment to achieving the 87% to 90% long-term ICR range and you're committed to that, even if you have to trade off some WSE growth. I just wanted to start by asking, can you speak to like, how material you see that being or like how much of the book potentially would have to be cleaned up to achieve that?

Yes, thanks, Andrew. I really appreciate the question. And certainly, our first and best data point that we have is the October 1st renewals. And if you take a step back, we've made a pretty significant set of changes and investments in our risk management capability, carving out the insurance services group, bringing in Tim Nimmer. He's got a great background, particularly around healthcare. He's already made some ads on the actuarial side. So, I'd say we've got a material sort of improvement in our risk management and our sort of ability to understand what we're seeing in the data and then to look forward. And our view, I'd say, is that the elevated trend we're seeing today isn't going to abate in '25. And so we build those double digit increases in the October 1st renewals. And as Kelly went through, we're really encouraged with the retention of that cohort. And our CRM team and our service delivery teams are doing a very, very good job. We've got our eye on January 1st, similar to probably slightly higher renewals coming then. So I think it is one of these really good parts of the business model is that while benefits is really important and healthcare is important inside of benefits, what we do for customers is much broader. And that service proposition, I think, lends itself to a much stickier situation. So I think that's what the positions as well. Our early read here is that it's actually quite good, particularly for our existing customer base. They've experienced trying that and that puts us in good stead. On a new business front, we've made the same adjustments on our prospective pricing. We like the pipeline, the demand for the product. I think we are seeing a bit of pressure on conversion rates and I think that's a little bit the environment. Our SMB prospects are a little cautious on hiring. I think they're a little cautious to make major changes to their HR and benefit setups as well. So that's probably the more sensitive area is resales growth. I feel really good and confident about the existing base.

Okay. That's super helpful. Appreciate those comments. I just had one quick follow-up. I know that you guys are growing over -- pretty significant sales growth from last year. So the 40% on top of would be '22 [ph] seems really strong. I'm curious as you look into next year, I know you talked about, making investments in distribution last quarter. I was curious if you could give any more color just on those investments in multi-channel distribution?

Sure. Yes, thanks. And like I mentioned, the pipeline, if we look at the pipeline for January 1, same day, year-over-year, we've got nice growth, double digits, 20% plus in terms of volume. That's really encouraging to us. We've grown the count of total intended reps by about 14% year-over-year, which is encouraging. I'd say one of our big focus areas, I should add, we brought a new Chief Revenue Officer in, Shea Treadway. He's been in a couple of months, deep, deep experience in building strong sales culture and as well as multi-channel distribution and employee benefits brokers. So he and the team are working hard on the steps we can take to drive productivity through this bigger sales force. A big part of that will be driving retention and ultimately higher, you know, sales levels on those more experienced, more capable reps. The second piece of that is the brokerage channel, which has actually been a good add to our sales here in 2024. But as we sort of look out into the SMB market, of SMBs that offer healthcare, which is a little bit north of 70% under 100 employees, about 90% of them get benefits through employee benefits brokers. And so building a sustainable approach to that channel is something we're pretty excited about.

Thank you very much. Appreciate the color.

Thanks, Andrew.

The next question comes from Kyle Peterson with Needham. Please go ahead.

Great. Good morning, guys, and thanks for taking the questions. I wanted to start off on the 4Q guide for professional services revenue. I guess it's calling for a pretty decent size step down both year-on-year and sequentially. So if you guys could provide any more color on how much of that is maybe due to some of these workforce reductions and stuff that's where clients had in September versus any, like, whether it's just macro or other drags or just any more color on some of those headwinds in the services segment would be very helpful?

Yes, Kyle, it's Kelly. Good morning. I'll be happy to take that one. The first and foremost point that you need to remember is last year we had a little bit more of a one-timer. We had about $8 million or so of some revenue recognition that we got in the fourth quarter that just is not recurring this year. Secondly, we are assuming slower hiring. So as we're looking at our WSE pipeline, we're just assuming that we're not really going to get an uptick in hiring in 2024 is going to look a lot like 2023 from that perspective. So it's really just those two things from a sequential perspective, it's just down a couple of points and about flat with last year.

Okay. That is helpful. And then, just on timing with your insurance repricing, I think you guys said that you guys have more than two-thirds of the book repriced now. Could you just, I guess, remind us, what time frame we should think about the kind of the roughly last third is that, over the next one to two quarters, like how should we think about when the rest of the book is expected to get repriced based on renewal cycles?

Yes. So just to clarify part of your intro there, by January 1 we'll have a little over two-thirds of the book priced. So the other renewals of the smaller cohorts are at Q1, so the fourth quarter for one renewal. And then July is the smallest, April is a little bit larger.

Okay, sounds good. So I guess you guys didn't reprice, so July would still need to reprice it that even though it's smaller, it hasn't -- it didn't reprice this past year?

Right. So if you, you know, from a cycle perspective, we have to release our pricing to our customers about 90 days in advance. And so if you think back to earlier this year, we did make some modest changes to our July pricing as we were looking at implementing it. But given the change healthcare reach in the month of March, the data was still a little bit murky then. And so, we did tweak some pricing on the margin as we were evaluating data that was coming in January and February because those really weren't obfuscated by that. But we will have to price it to an appropriate level just given the trends that we're seeing from a severity perspective.

Okay. Thank you very much for taking my questions.

Thanks Kyle.

The next question comes from Kevin McVeigh with UBS. Please go ahead.

Thank you so much and good morning. Any sense, I mean, it seems like particularly that the kind of CIE seems somewhat abrupt, just given the fact that kind of where we are on the site, just given, I guess, the percentages. Is that right or is there anything, I mean, I know certain verticals have been kind of weak, but they've been weak for, I think, a while. Just any thoughts, Mike, as to what kind of -- was it the cost that really drove it? Just, you know, any thoughts, because it's obviously a pretty decent deceleration?

Yes. I appreciate the question and good morning, Kevin. I guess I'll take one step back and say, in general, we really do like the verticals that we target. And if you take a very broad, 10, 12, 15 year perspective, these verticals are proven an average growth rate of sort of 8% to 12%. And so I think your question is a very good one about, like, what's happening in the year. And then we take one kind of step back from that and it's like, compared to a historical average, but it's a pretty sizable impact on the business. And the reasons you understand, CIE comes in with very low acquisition costs and pretty low incremental servicing costs. So the impact of a flat CIE like we're experiencing today versus a historical norm of 8% to 12%, it's a pretty material impact on the top line, the bottom line as well. And like we talked about in the prepared remarks, we're sort of seeing it like the U.S. economy is actually pretty robust from an employment point of view. But when you go down one click, you're seeing things like manufacturing, government, healthcare, as you've seen, certainly, costs are coming from somewhere. And part of that is the provider system staffing back up. Our targeted verticals, we're just not seeing that growth. And all the way to the micro question of what we saw even in the quarter, a little bit of net hiring in the first couple of months in the quarter. And then in the last month, actually saw kind of gave that fall back some seasonal hiring, interns that are in over the summer, temporary summer help, sort of a little bit of a bigger impact than we'd seen prior. So, again, we think it's prudent to have a conservative assumption going forward in the short term on CIE. But again, like the verticals and sort of earning power in the customer base, even with a partial reversion back to historical norms is pretty marked.

Got it. So wasn't any client loss or anything like that, right? I mean, that wouldn't be factored in. This was just kind of purely employee driven?

Now you got it exactly. I mean, at the client level, as far back as we were able to pull the data, this is going to be a record client retention year for us, which is credit to the team. But yes, just within the client base, we just -- and actually, to be honest, the layoff levels are pretty, not too, too far off from what we would have seen a couple of years ago. It's just that the new hires are just not coming in at the pace that we would like to see. I think a lot of our high growth verticals there, we tilted the balance here a little bit towards margin expansion and away from growth. And so they're being cautious on the new hires.

That's helpful. Thank you.

Thanks Kevin.

[Operator Instructions] The next question comes from Andrew Nicholas with William Blair. Please go ahead.

Hi, good morning. Thank you for taking my questions. I wanted to circle back to the commentary regarding kind of balancing WSE growth and ICR and pair that with the preliminary 2025 outlook on ICR. I guess I'm trying to understand, given renewals seem to have gone quite well in terms of getting your targeted price increases, retention is good. Why is it then that you wouldn't see an uptick in the ICR sooner? Is it a function of the fact that a third of the book will not have been repriced to start the year? Is it maybe you didn't, you weren't as aggressive with price increases late to keep retention high? I'm just trying to understand what the different dynamics are, because I would think if you're able to raise price and maintain clients on the book that maybe see a bit better outlook next year compared to the 90% that you're looking at in 2024.

Sure. Maybe I'll start and then Kelly, please jump in. Thanks for the question, Andrew. You hit on it and you touched a little bit, but just again, I think it's worth pausing for a second because it's an industry-wide phenomenon that we're experiencing. Most players that have exposure to help this have really one shot a year, particularly in the SMB market, to make adjustments. And I think this cohort by cohort, quarterly approach is a really attractive element of the way we get to market here at TriNet. And you're exactly right in terms of, okay, why wouldn't you have snapped all the way to your long-term ICR target for full year 2025? I think the reality is pretty much what you're saying. You would have had to have on January 1, the entire customer base price to the level that we were anticipating claim trend to be at. It'll take a bit of time to work through that other third of the book in the year as sort of a key contributor. Then there's a little bit else in the ICR around our workers' comp linings is in there as well, particularly favorable this year with one-time reserve adjustments that won't occur next year. So there's a couple of little moving pieces, but again, as we work through fourth quarter, as we see experience here in the first quarter, that's all rate data that we can put in and actually put into pricing like Kelly said, 90 days later. Kelly, anything that you would add to that?

I think you cut the bulk of it there. Good job on the reminder on workers' comp too, because we're not planning on that recurring next year.

That's very helpful. Thank you. And maybe as a follow-up to that discussion, understanding that the macro is incredibly difficult to predict and healthcare utilization over any short-term timeframe can be lumpy. How do you feel about the conservatism of your outlook for the fourth quarter? What are you assuming or what do we need to have happen or change from year-to-date levels on the claims front to be outside or above that range? Any thoughts on the conservatism of the outlook you provided? Thank you.

Yes, Andrew, I'll be happy to start and then I'll throw it to Mike if he has any other thoughts. As we're looking at the fourth quarter, that's really our best estimate on the range. Our fourth quarter has our pooling resets, which since one of the reasons for the experience this year really dealt with severity, the number of high-cost claims is materially up year-over-year. And so with that pooling reset that does create a little bit more pressure in the fourth quarter than we would see from normal seasonality there. So, what would have to be right for it to not -- what would we have to see different? It's a pretty wide range at three points is really what I would say. Anything you want to add.

Thank you, Kelly.

Thank you, Andrew.

The next question comes from Jared Levine with TD Cowen. Please go ahead.

Thank you. Yes, just wanted to double-click in terms of the sales headcount growth. Previously, you were targeting about 20% growth for this fall selling season. So can you just discuss kind of what results in you not getting to that 20% growth target and updated thoughts on sales headcount growth here over the near term?

Yes, thanks Jared. We definitely talked about that 20%. I don't think there's a lot of magic to sort of be in the 13% range other than to say they're really pleased with the quality of the folks that we've brought on. I think in, actually we've talked about this. The productivity lever for us is becoming increasingly important. I feel like the pipeline is robust. We're covering the market reasonably well. Having more tenured, more experienced sales reps in place to take advantage of that prospect pipeline as it comes through and drive the better conversion rate is, I would say, increasingly our focus going forward.

Got it. In terms of PEO bookings, you did call out some impact in terms of the pipeline conversion. What would you primarily attribute to that? Is that macro uncertainty? Is it the elevated health cost pricing that we're seeing there?

Just like you said, the demand for what we do is very high. Again, we like very much 20% plus same day year-over-year as we look through championship season here for us. And by the way, we talked about this as well. But a lot of the short-term pain in healthcare is long term tailwind of our business model. And so, we've got real work to do here to reprice the book. But at the end of the day, the kind of cost and the kind of complexity facing small businesses as they're trying to offer competitive benefits is only getting tougher, which only drives the demand for what we do. I think it is the cautionary decisioning that the lengthening of sales cycle is a key driver for us. And the other piece, and we talked a little bit about this, but we have actually made some pre-material changes by breaking out the insurance services group, adding some considerable talent, centralizing data and putting in more discipline, I would say, process both at new and at renewal. And so, I think we're getting better at our risk management. We are going to price to risk. And so you heard it a little bit in my prepared remarks. Does every player adjust as quickly and bring the same sort of level of risk management expertise? I can't really speak to that. And so for us, it's kind of prudent to assume there's going to be a little bit of conversion rate pressure for that reason.

And then just lastly here real quickly, in terms of the 1Q discussions around health enrollment in terms of those pricing discussions, is it, do you feel like it's setting up pretty similar here to how it's going in 4Q where you're maintaining so really healthy retention or any kind of differences that you're seeing in terms of these 1Q health enrollment discussions?

Nothing that's emerging different at this point. We do inspect pretty closely the major health carriers as they're sort of talking about the results and what they're seeing very much in line with what we're seeing. A number of folks that we would be competing within the market are working with carriers that are again seeing very same dynamics that we're seeing. So I think because it's a market wide phenomena that gives us a little bit of extra confidence that the prices that we're seeing are not outsized relative to the market and we're not an outlier.

Yes. And Jared, the thing I would add to that too is, we do price every individual customer to its risk as best we see it based on a number of factors. So the dispersion of price increases does vary on a customer-by-customer basis, just depending on the risk. We usually do provide some pretty detailed claims information so they understand the basis for the renewal and really try to engage with our customers on anything that they can do as well preventatively to make sure that they can control their claims costs. So, that is part of the value that we bring to our customers to really help them manage what outside of salary, one of the biggest costs of their business.

Got it. Thank you.

Thanks, Jared.

The next question comes from David Grossman with Stifel. Please go ahead. Thank you.

Thank you. Good morning. I'm wondering if you could maybe help us understand what the competitive dynamic looks like in an environment like this, particularly given, how an at-risk PEO kind of can perform relative to the PEOs who don't take risk. Is it an environment that would typically push you at a disadvantage? Would it put you at an advantage or do you think it really doesn't have much impact given that a couple of your larger competitors are largely passing through healthcare?

Yes. Good morning, David. It's Mike. Thanks for the question. At this point, yes, I don't know that there's a huge difference in where we are. I would say on balance, we do like the flexibility that being on risk allows us. Kelly just sort of highlighted the process that we go through at renewal, similar approaches taken in evaluating prospects. I am actually, though, excited about the potential here at TriNet over time. We've talked a little bit about the investments that we've made in insurance services and risk management. And we're materially better than we were at the start of the year. I see a similar level of improvement that we can put in place over the coming quarters. And I think the better we get at understanding the risk that we're taking on being more consultative with our clients once we are on risk with them to help them manage that cost, providing a differentiating experience. I do think over time, that's a capability that we can develop and exploit to the benefit of our customers and to kind of our ability to grow in a sustainable, profitable way. I don't have the data set in front of me, David, today, and sort of be able to quantify for you what that difference might be. But as I look out, I'm pretty encouraged about the potential there.

Right. And Kelly, I thought you said, if I heard you right, that you released your pricing 90 days in advance. If I heard that correctly, does that imply that the pricing for the October 1st renewals would have gone out prior to the uptick in utilization? I just want to make sure that I understood that comment and the impact that may have.

Yes, happy to answer that, David. We had -- when I answered Kyle's question, I mentioned sort of the obfuscation from the change healthcare, and we're getting more and more data as we were about to release those prices kind of at the beginning of July. As we evaluated it, we did see trends starting to elevate, and so, did quit through an appropriate double-digit price increase. And we do think, 2020 hindsight, that's adequate just based on the risk of the individual clients within that renewal cohort.

And so does that imply that you would have a similar increase on the January 1st cohort then as well?

It is, our expectation is similar. Yes. And we are watching and having conversations with clients right now. Just the realized level may come in slightly different because we assume like-for-like plans and there may be buy ups or buy downs that change the percentage, but it is in the ballpark of the same area.

Right. And I'm sorry, I missed some of your commentary about the fourth quarter professional services revenue. I thought you said limited CIE contribution. Is there anything else that's impacting the year-over-year growth?

Yes, the other one, David, that I mentioned was last year we had somewhat of a one-timer, $8 million of revenue recognition associated with some certain set of fees and that's not recurring this year.

Okay. I'm sorry. I thought that was in the third quarter. Got it. And just lastly, I know worker's comp is -- the tailwind is diminishing throughout the industry. Can you give us a rough sense of how much of a margin headwind worker's comp will be in 2025?

Well, we've tried to call out some of the unusual items as they've come through, we go back and look at our disclosures just to make sure that we can gather that up for you just based on what we've said publicly.

Okay, guys. Good luck. Thanks very much.

Great. Thank you, David.

Thanks David.

This concludes our question-and-answer session. I would like to turn the conference back over to Mike Simonds for any closing remarks.

Thank you, Drew. And I just want to quickly say to our shareholders that the best days for TriNet are ahead of us. You've heard it through about prepared remarks and Q&A. Effective risk management is really important to me. We have and will continue to make the investments in this capability. And even as we're tackling the challenges of healthcare head on, we are taking necessary steps on the future to create a more focused, more differentiated, more efficient TriNet, one that I am really excited about and one that I think is very much capable of sustainable and profitable growth. So I appreciate the questions. I appreciate everyone that took the time to join us on the call today. I look forward to engaging with many of you, Kelly and I do, over the coming weeks and months. And with that, Drew, we can conclude today's call.