Logo of jester cap with thought bubble.

Image source: The Motley Fool.

Insperity Inc (NYSE:NSP)
Q4 2019 Earnings Call
Feb 11, 2020, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good afternoon. My name is Erica and I'll be your conference operator today. I would like to welcome everyone to the Insperity Fourth Quarter 2019 Earnings Conference Call. [Operator Instructions]

At this time, I would like to introduce today's speakers. Joining us are Paul Sarvadi, Chairman of the Board and Chief Executive Officer; and Douglas Sharp, Senior Vice President of Finance, Chief Financial Officer and Treasurer.

At this time, I'd like to turn the call over to Douglas Sharp. Mr. Sharp, please go ahead.

Douglas S. Sharp -- Senior Vice President of Finance, Chief Financial Officer and Treasurer

Thank you. We appreciate you joining us this evening. Let me begin by outlining our plans for this evening's call. First, I'm going to discuss the details of our fourth quarter and full year 2019 financial results. Paul will then recap the 2019 year and discuss the major initiatives of our 2020 plan. I'll return to provide our financial guidance for the first quarter and full year 2020. We will then in the call with a question-and-answer session.

Now, before we begin, I would like to remind you that Mr. Sarvadi or I may make forward-looking statements during today's call, which are subject to risks, uncertainties and assumptions. In addition, some of our discussion may include non-GAAP financial measures. For a more detailed discussion of the risks and uncertainties that could cause actual results to differ materially from any forward-looking statements and reconciliations of non-GAAP financial measures, please see the Company's public filings including the Form 8-K filed today, which are available on our website.

Now let's discuss the details behind our fourth quarter results. We reported Q4 adjusted EBITDA of $41 million and adjusted EPS of $0.57, slightly above the midpoint of our forecasted range. Average paid worksite employees increased by 10% over Q4 of 2018. Gross profit increased slightly, as higher benefit costs were partially offset by improved pricing. As you may recall, our Q4 forecast included higher benefit costs for the possibility of continued elevated large claim activity coming off of Q2 and Q3's activity. During Q4, the number of large claims continued to decline from the high point in Q2. However, remained elevated when compared to the period prior to Q2 of 2019.

Now we once again performed in-depth analysis of the large claim activity. Similar to Q3, a detailed review of the Q4 claims continued to indicate that the large claims were associated with a very small number of participants, the claims were largely from different participants as opposed to ongoing claims from the same group of participants in prior periods. And a review of the clients associated with these large claims did not indicate a concentration associated with new clients COBRA participants or a particular region.

In addition, the overall demographics of our plan, continue to trend favorably. So while our analysis does not point to a systemic issue in our health plan that is driving these elevated large claims, the fact is we have now experienced three consecutive quarters of elevated activity. In my discussion of full year 2019 results and 2020 guidance, I will outline how we have incorporated this large claim activity into our 2020 plan and the action steps we have taken to help mitigate this risk.

Now moving on to operating costs. Our fourth quarter adjusted operating expenses increased 4% over Q4 of 2018 to $134 million and included continued investments in our growth, technology and product and service offerings, partially offset by lower cash and stock-based incentive compensation costs, consistent with the plans pay-for-performance structures. Our effective tax rate in Q4 was 26% and net interest expense was slightly higher than expected, due primarily to utilization of cash and debt for our capital expenditures, share repurchase and dividend programs.

Now before I turn the call over to Paul, let me summarize our full year 2019 operating results. Adjusted EPS increased 11% to $4.15 and adjusted EBITDA increased 4% over 2018 to $250 million. Average paid worksite employees increased by 13% over 2018 and this growth was driven by a 12% increase in the average number of trained Business Performance Advisors and client retention of 85%, slightly offset by lower net worksite employee gains in our client base.

Gross profit increased 7% on the percent worksite employee growth and included a negative impact of the elevated large healthcare claim activity. This claim activity largely drove a 4% benefit cost trend in 2019 compared to the 2% to 3% forecasted trend at the outside of the year. In fact, for the full year 2019, the proportion of our costs related to individual claimants exceeding $250,000, increased 26% over the 2018 period. This included 27 claimants over $1 million at a total cost of approximately $37 million more than double the amount experienced in 2018.

Now, we are happy to report that beginning in January of this year, we added a new feature to our health plan. While our health insurance coverage with our national carrier is provided under policies or service contracts that are fully insured, we retain an obligation to pay the carrier for the cost of the claims. Under this new feature though, we will no longer have financial responsibility to the carrier for the portion of our participants claim costs that exceed $1 million in any calendar year. So this feature will provide us with the financial cap for individual significant large claimants.

It's important to note that this new cap is not designed to protect against the step-up in the frequency of large claims below $1 million, which was a primary driver of the increased costs we experienced in 2019. However, we believe that putting in this cap may have slightly dampen the effect of large claims in 2019 and is a prudent step in managing the overall risk in our health plan. The premium cost of this new feature is based on the number of healthcare participants per month and is not expected to negatively impact our overall gross profit per worksite employee in 2020.

Now adjusted operating expenses increased 11% over 2018 and included a 12% increase in the average number of trained Business Performance Advisors and the opening of nine new sales offices. We also continue to invest in our product and service offerings including our Workforce Acceleration solution and in our technology platforms, data privacy and security.

Now a solid balance sheet combined with our strong cash flow allowed us to continue to provide strong return to our shareholders in 2019 through our dividend and share repurchase programs. We repurchased a total of 2.1 million shares during 2019 at a cost of $203 million. Additionally, we increased our dividend rate by 50% in February of 2019 and paid out a total of $49 million in dividends. We ended the year with $108 million of adjusted cash and $30 million available under our credit facility.

Now at this time, I'd like to turn the call over to Paul.

Paul J. Sarvadi -- Management Director, Chairman and Chief Executive Officer

Thank you, Doug, and thank you all for joining us today. Considering the unusual and unexpected challenges we faced over the last half of 2019, I would like to provide some depth and color around exactly what took place and how we have responded decisively with a plan to regain our growth and profitability momentum over the course of 2020. I'll also highlight the important progress we made on three strategic initiatives that we expect will contribute substantially to a quick rebound and in the success of our long-term plan. These initiatives included an emphasis on pricing our flagship Workforce Optimization solution, gaining traction in our Workforce Acceleration traditional employment offering and the development of a data science and data analytics strategy for Insperity.

First let me drill down on obstacles we faced in the fourth quarter in client retention, benefit plan dynamics and new client sales. This will provide some clarity around the year-end transition and the starting point for January that set the stage for our 2020 operating plan. As we enter the fourth quarter, we believe we were well positioned for an effective fall campaign with a strong pipeline for new sales and we were confident the strong client retention we have experienced over the last several years would continue. The last five years we demonstrated a significant improvement, reducing January client attrition from over 9% of the prior December paid worksite employees to 7.8% in 2015, and less than 6% from 2016 through 2019. This improvement resulted in the step-up in full year client retention from approximately 80% before these improvements, so around 85% in the last several years.

This January, worksite employees loss from client attrition came in at 7.3%, a 180 basis points above January 2019, which was 5.5%. This was a primary driver to the lower than expected starting point in paid worksite employees for 2020. In addition, new sales were not enough to offset the attrition, but we'll get to that subject in a few minutes. The client attrition difference of 180 basis points was the result of an increase in client terminations in our larger account segments including emerging growth and mid-market clients. The two primary reasons given for these terminations were mergers and acquisitions and cost or value considerations.

Worksite employees leaving Insperity due to client M&A transactions increase in our emerging growth in mid-market segments, accounting for approximately 47% of the difference above expected terminations. Cost or value considerations comprised another 42% and the remaining 11% difference was spread to a variety of other reasons. We actually improved client retention in our core accounts with less than 100 worksite employees. So our emphasis going forward will focus on what we can do to improve results in our emerging growth in mid-market segments. There was a silver lining regarding this attrition. This group of terminating clients had a gross profit contribution 12% below the average of our client base due to a combination of lower pricing allocations compared to their direct costs, including benefits.

This is particularly important when considering the second challenge we faced in Q4. As Doug mentioned, although the number of large healthcare claims declined each of the subsequent quarters since the sudden spike in Q2, we continue to see an elevated number of large claims compared to previous levels. Fortunately, we experienced considerable pricing strength throughout 2019 in both new and renewing accounts.

One of our key initiatives last year was an emphasis on pricing our Workforce Optimization services. Our success in this initiative contributed substantially to starting 2020 in a better position to offset the direct cost increase from the health plan. When you weigh in the positive effects from the lower priced clients terminating at year-end to our enhanced overall pricing, we are starting this year in a position to be able to match the expected direct cost trend including benefits with just a modest level of targeted increases over the course of the year.

Now let me address our fall campaign sales effort, which also faced some headwinds. We were above 95% of Workforce Optimization sales goals for the first two months of the campaign through October. We also had enough prospect business profiles or opportunities to bid our services to have confidence that we would reach our objectives, finishing the year with historical closing rates. However, November sales came in lower than expected and with the holidays falling in the middle of the last two weeks of the year, our sales leadership responded immediately. We developed a plan to regain sales momentum and meet the goal by implementing an incentive plan and extending the campaign through January.

Now each year the typical fall sales campaign pattern includes strong sales in November and December as the pipe -- full pipeline is converted to close sales. This is usually followed by a relatively low sales budget in January when we hold our annual sales convention. This year, however, we needed a very strong January more than three times the norm to make up for the shortfall. And I'm pleased to report these efforts were successful in getting all hands on deck and turning the ship around very quickly. Our January sales results more than recovered the sales shortfall and we exceeded our fall sales campaign goal. Remarkably, we also boosted future sales activity with the 28% increase in discovery calls and a 40% increase in business profiles.

Now, in our business, sold accounts do not roll into our financial results until the accounts in the corresponding sold employees are enrolled and their first payroll is run, thereby, becoming paid worksite employees. So the result of hitting the fall campaign goals later than normal shifts the timing at which employees roll into the financial results. This further accentuates the lower starting point and therefore overall growth rate in 2020. However, we are now in a good position to regain our growth momentum and see growth acceleration as 2020 unfolds.

Our plan for this year is to continue to grow the number of trained Business Performance Advisors at 11% moderating from the fourth quarter high of last year 14%. This should improve the mix of new BPAs compared to more experienced and tenured staff, which we expect will result in an improvement in overall sales efficiency. We also have a new and exciting opportunity to improve sales efficiency as a result of our 2019 initiative around data science and analytics. Early last year, we established a key long-term initiative for the Company to add to and organize our resources to focus on the potential for data science and analytics to improve our business.

Over the year, we develop the methodology, strategy and technology stack necessary to implement account-based marketing applying a data-driven approach to validating and capitalizing on our vast market opportunity. The potential improvement from this methodology is dramatic. Instead of the traditional approach filling the funnel at the top in spending substantial time, effort and money to close one out of 10 clients, this approach is far more effective and efficient targeting ideal prospects and engaging them just when they're looking for a solution that we provide.

We've been able to take a subset of our clients that joined Insperity over the last couple of years and combine our current client company profile data with publicly available data from before they became a customer. We utilized over 20,000 inputs or relevant characteristics related to each client company to produce the most concise client profile, we have ever developed including both demographic and psychographic elements. Through this technology, methodology and with the help of a strong team, we've been able to compare this profile against the entire U.S. small and medium sized business marketplace and determine the actual total addressable market at whatever fit percentage you want to apply at any given time.

The first benefit of this is confirming our actual total addressable market opportunity for Insperity. For years, we have estimated from the best available sources approximately 600,000 prospects fitting our assumed client profile. Out of the 7 million, small and mid-sized businesses in United States, this analysis shows that there are over 1.7 million companies at a 50% fit against these 20,000 data identifiers. We can now confirm that this analysis shows more than 600,000 prospects with a 75% fit, lining up with our previous estimate. More importantly, we can actually identify these companies market by market that fit this precise demographic and psychographic profile.

Now, this is where it gets interesting, analyzing the pattern of behavior of our clients before they became customers has provided information to determine intent looking for the services we provide and engagement actually interacting with us or competitors. These activities or patterns and behavior can also be compared to the universe of prospects at any given time. For example, when we ran this analysis early this year at a 90% fit, there were over a 190 perfect fit prospects with just under 16,000 showing intent at that time. Now although we're early in the process, the opportunity for us to direct our highly trained Business Performance Advisors to precisely the right prospects at the right time has tremendous potential to improve sales efficiency. Now this data-driven approach is especially relevant to a premium service model like ours, where the client profile is very important for both growth and profitability. We expect to use this data-driven methodology to drive growth, retention and operational effectiveness in 2020 and beyond.

Now the third strategic win we had in 2019 was gaining traction in the sale of our Workforce Acceleration traditional employment option. Our goal for last year was to expand adoption of this strategy across our BPA team throughout the country. This approach includes introducing both co-employment and traditional employment solutions early in the sales process. The objective is to ultimately convert some percentage of the nine out of 10 prospects that either don't qualify or not ready for Workforce Optimization into Workforce Acceleration clients.

We made considerable progress last year with 573 BPAs bringing in business profiles for Workforce Acceleration. Over 265 different BPAs, actually made a traditional employment sale and total sales for the year exceeded 13,500 employees. This initiative is definitely gaining traction. Our goal for these sales is to ultimately represent approximately one-third of the value to Insperity compared to Workforce Optimization clients. Importantly, these sales come without the benefit plan risk, contribute to improving gross profit and represent a future opportunity to upsell to the full co-employment service improving overall sales efficiency.

The results we had in 2019 combined with continued momentum we expect in 2020 Workforce Optimization [Phonetic] should make a welcome contribution of incremental gross profit this year. More importantly, the progress we made in this area last year represents an important strategic gain for our long-term plan. So we have certainly experienced some challenges in 2019 that interrupted our momentum in contrast to the exceptional track record we demonstrated over the five preceding years. In our residual income business model and interruption in growth and profitability, unfortunately, resets the starting point, which is what we are facing this year. As a result we're expecting 6% to 8% unit growth for the year in paid worksite employees, more in line with the industry growth rate. We expect to start the first quarter at the low end of this range and anticipate growth acceleration as the year progresses.

Another element of a reset of this nature is the pressure on the operating plan. In this case, we have limited our projected operating cost to the run rate from the end of last year and adding only the most important investments that contribute to regaining the momentum and getting back on course with our long-term plan as soon as possible. These investments include growing the BPA team opening seven offices in two new markets. We also will continue investment in technology development to continue our leadership in this area. We expect this break in momentum to be short-lived, so we've determine this is the best course of action and Doug has included this in the guidance I'll provide momentarily.

So I've explained what happened and how we've responded decisively with a plan to regain our momentum as we move through this year. What I've not explained is why these challenges occurred. We identified a variety of factors anecdotally, each of which may have individually played a role in sales or retention. However, we were unable to validate any overriding theory in the data. Through this analysis, however, we found and will continue to identify opportunities for incremental improvements. But the bottom line is in 2019, we did not execute up to the high standards we have historically achieved and we have responded accordingly. Despite the execution issues, if not for the elevated large claims, we would have exceeded our original 2019 budget for adjusted EBITDA of $276 million.

We believe Insperity is in the best position ever to capitalize on our vast and exciting market opportunity and we expect the same dedicated employees and positive corporate culture that drove five straight years of exceptional results will demonstrate amazing resiliency in the months ahead. Our corporate culture is underpinned by nine core values that have been the foundation of a proven track record of overcoming challenges. With these statements in mind, we'll focus on the fundamentals necessary to accelerate our growth, recover our profitability and lay the groundwork to reach our goal to return to double-digit growth in 2021.

At this point, I'll pass the call back over to Doug.

Douglas S. Sharp -- Senior Vice President of Finance, Chief Financial Officer and Treasurer

Thanks, Paul. Now let me provide our 2020 guidance beginning with the full year. As Paul just mentioned, we are forecasting 6% to 8% growth in the average number of paid worksite employees for the full year 2020. Our growth plan includes an 11% increase in the average number of trained Business Performance Advisors, full year client retention of 83% and a similar level of net gains in our client base as 2019. As for our gross profit area, we have gone through our usual budget process of analyzing client mix, pricing and direct costs, including recent healthcare and workers compensation claim trends. As for the total benefit costs including health, dental, life, disability and other benefits, we are forecasting an overall cost trend of 2.5% to 3.5% over 2019.

The three components, driving this overall increase for 2020 include the underlying healthcare claim trend, large claim costs and other benefit costs administrative fees that have a relatively flat cost trend. Now within the health plan, with our national carrier, our forecast assumes that trend of 3.5% to 4.5% for the underlying claim costs when considering plan migration to lower cost options and other demographic factors. As for our forecast for large claim activity, while it is possible that the frequency of these claims revert back to levels prior to Q2 of 2019, we have taken a more conservative approach in our 2020 forecast.

Even though we have seen a slight decline in the number of quarterly large claims since the peak in Q2 of 2019, the upper end of our benefit costs range assumes an increase in the number of large claimant in line with our projected worksite employee growth. The lower end of our forecasted benefit costs assumes the number of large claimant generally in line with the elevated levels experienced in 2019. As for our other direct cost areas, we are forecasting some improvement in our payroll tax area due to lower state unemployment tax rates, we also expect to see -- to continue to see strong results in our workers compensation program. However, consistent with previous years, we are starting the year with a higher cost estimates than 2019 and allowing for our effective safety and claims management to drive additional cost benefit throughout the year.

On the pricing side, our long-term objective is to adjust pricing based on our forecasted cost trends. We will start 2020 just below our expected cost trend because of a slight outperformance of pricing in Q4. And a favorable step-up at year-end, due to the turnover of new and renewing clients. Our pricing strategy over the course of 2020, we'll target increases slightly above our expected cost trends. And the good news is that the pricing changes should be modest and are expected to be very competitive. We would expect this pricing strategy to improve gross profit in the latter half of 2020 and position us for improved profitability in 2021. If large claim activity returns to pre-2019 levels, we could expect a substantial recovery in 2020 gross profit when compared to 2019.

Now our 2020 operating plan includes managing our operating costs to account for the lower starting point in paid worksite employees while minimizing the impact to our long-term plan. This year's plan includes continued growth in BPAs, the opening of seven new sales offices, continued investment in our technology and the advancement of our traditional employment initiative Workforce Acceleration. When combined with our growth plan and projected pricing and direct cost trends, we are forecasting 2020 adjusted EBITDA in a range of $250 million to $274 million.

As for adjusted EPS, our guidance is impacted by an increase in the estimated tax rate due primarily to less tax benefit associated with the vesting of performance-based and time-vested restricted shares in Q1 of 2020. We are estimating a full year 2020 effective tax rate of 28% compared to 20% in 2019. And this difference is expected to have a $0.28 per share impact on both our Q1 and full year 2020 earnings. After giving consideration to this, we are forecasting full year 2020 adjusted EPS in a range of $3.73 to $4.16.

Now as for our first quarter guidance, based largely on our January starting point, we are forecasting 5.5% to 6.5% growth in average paid worksite employees in Q1. As for our gross profit area, keep in mind that benefit costs in Q1 of the prior year included a much lower level of large claim activity than the latter three quarters for 2019 and our forecast for Q1 of 2020. This is expected to impact the Q1 2020 year-over-year comparison of gross profit and earnings. We are forecasting Q1 adjusted EBITDA in a range of $98 million to $103 million with the midpoint relatively flat with 2019.

After giving consideration to an increase in effective tax rate from 20% in Q1 of 2019, to an expected rate of 27% in Q1 of 2020. And for the reasons that I just discussed, we are forecasting Q1 adjusted EPS from $1.61 to $1.70. And as for our quarterly earnings pattern, keep in mind that our Q1 earning results are typically higher than subsequent quarters. In particular, we typically earn a higher level of payroll tax surplus prior to worksite employees reaching their taxable wage limits. And benefit costs are lower in Q1 and step-up over the remainder of the year as deductibles are met.

Now at this time, I'd like to open up the call for questions.

Questions and Answers:

Operator

[Operator Instructions] Our first question comes from the line of Jim Macdonald from First Analysis. Your line is open.

Jim Macdonald -- First Analysis -- Analyst

Hey, good morning guys, or good afternoon, I guess. Can you talk about the larger client losses, we haven't seen those in a while. Were there any notable like large 1,000 person [Phonetic] -- 1,000 company losses, anything like that?

Paul J. Sarvadi -- Management Director, Chairman and Chief Executive Officer

Well, yes, as I mentioned, the difference in what we would have expected was in our larger emerging growth and mid-market customers. And really the only surprising thing was that the M&A activity that we saw, you do lose some for that. That's kind of part of helping our customers succeed and having them accomplished what they set out to do. But it was interesting that M&A activity seem to move deeper into the client base than previous years. We didn't have our largest customer leave, or anything like that, but we did have higher frequency of these large customers leave from that M&A activity. The balance of it was -- that was about half of the difference than -- above what we would have expected another 40% or 42% were for cost type considerations.

Jim Macdonald -- First Analysis -- Analyst

Okay. And so you probably given the -- the benefits trend have been raising prices more than you did last year. Do you think that impacted your year-end performance?

Paul J. Sarvadi -- Management Director, Chairman and Chief Executive Officer

It could. When we really get this into the details of what happened, kind of case by case, there just -- and we do a really deep investigation of variety of, I don't know, 20-some reason codes of what customers tell us. It wasn't really an overriding theme, there were a lot of different things. Benefits cost in the marketplace were lower. There were just a lot of different detail items that might be an issue, but it didn't just jump out at us that, we drove cost and cause this much attrition. Obviously, driving cost wouldn't do anything -- driving price wouldn't do anything with M&A activity. And on those other ones, the fact that the -- the ones who went away, where our price-sensitive customers already, they were lower price compared to the cost. So across the board, if you look at our core market, we actually improved retention last year. So I don't think our pricing policy was the root cause.

Jim Macdonald -- First Analysis -- Analyst

Okay. And just on the benefits, I mean, three quarters in a row seem, I mean, you keep suggesting that there is no trends and things, but I mean it just seems like that's never, I mean two quarters in a row hasn't happened before. So it's -- it just seems like three quarters is sort of there's got to be something going on there.

Paul J. Sarvadi -- Management Director, Chairman and Chief Executive Officer

Yes, it's really what we said last quarter, of course, was that -- well, let me back up step in our history, we've had spikes and then the very next quarter kind of fell back in line or at least fell back enough in line that it didn't jump out. But what we've seen now is the spike and then a slow, painful decline or slower decline that we just have to bake in there now for going forward. But in our dialog with United, it's -- we're reverting back toward the norm, it's just taken a while.

Operator

Your next question comes from the line of Jeff Martin from Roth Capital Partners. Your line is open.

Jeff Martin -- Roth Capital Partners -- Analyst

Thanks, good afternoon guys.

Douglas S. Sharp -- Senior Vice President of Finance, Chief Financial Officer and Treasurer

Good afternoon.

Paul J. Sarvadi -- Management Director, Chairman and Chief Executive Officer

Good afternoon.

Jeff Martin -- Roth Capital Partners -- Analyst

I was wondering if you could help us think how to think about the growth acceleration throughout the year -- WSE growth guidance is 5.5% to 6.5% for Q1, how much will that accelerate to by Q4 do you think?

Paul J. Sarvadi -- Management Director, Chairman and Chief Executive Officer

Well, our target at this point, of course, is to get back to double-digit growth in January next year. So you're going to ramp up and you get the 6% to 8% range that we've provided. Obviously, need to be at the high end of that range as you get toward the back half of the year. Keep in mind, once you get toward that part of the year, you'll be focused on really selling the fall campaign to get the starting point up for January, a lot of those customers won't role until then. But you should be looking at that range would be at the threshold of heading toward 10% or above for next year.

Jeff Martin -- Roth Capital Partners -- Analyst

And within your guidance for that, how much contribution from the middle market do you factor in?

Paul J. Sarvadi -- Management Director, Chairman and Chief Executive Officer

It would be more in line with what we had last year. As opposed to the year before when mid-market really outperformed. We sell the same number of accounts in mid-market last year as we did the year before, but the average size was smaller, we didn't have a super jumbo in there. So we've incorporated something more in line with what we had last year.

Jeff Martin -- Roth Capital Partners -- Analyst

Right, OK. And then could you give us some contrast between the large benefit claims in Q2 relative to Q4? How much has that come down? And what kind of comfort level do you have that it could find some stability here in the next quarter or two and then maybe improve from there?

Paul J. Sarvadi -- Management Director, Chairman and Chief Executive Officer

Well, like we said, it didn't snap back in line with the pre-Q2 levels, but it's come down in frequency those two quarters in a row. And we felt like though it was important for us for budgeting purposes to not assume that was just going to keep happening with no basis for it. So instead, we've assumed kind of in our worst-case that the number of these claims goes up with our unit growth. And so, Doug, in the best case scenario that you said was...

Douglas S. Sharp -- Senior Vice President of Finance, Chief Financial Officer and Treasurer

Yes, the large claim is pretty consistent with the elevated amount that we experienced in 2019. So that's sort of at the low end. So obviously, we don't have in there the number going back and reverting back to pre-Q2 -- Q2 2019 levels in our forecast.

Paul J. Sarvadi -- Management Director, Chairman and Chief Executive Officer

We really don't have a trending lower, much less falling off. I mean if it did either of those things, you'll see some outperformance on that front. But just not a focus at this point to build any of that in.

Operator

Your next question comes from the line of Mark Marcon from Baird. Your line is open.

Mark Marcon -- Baird -- Analyst

Alright, good afternoon. The benefits cost for the fourth quarter, how much higher where they this fourth quarter relative to a year ago?

Douglas S. Sharp -- Senior Vice President of Finance, Chief Financial Officer and Treasurer

Well, I think if you remember, as I mentioned in my script, in our fourth quarter forecast, we considered, even though the data was pointing to no systemic issues relative to large claim activity -- we -- in our forecast, put in a similar level for the possibility of it continuing on from Q3, party -- fairly at the level we experienced in Q3. At the end of the day, Q4 large claim activity came in just very slightly ahead of that forecast that we incorporated into the Q4 numbers.

Mark Marcon -- Baird -- Analyst

Yes, we [Speech Overlap]

Paul J. Sarvadi -- Management Director, Chairman and Chief Executive Officer

Yes, the frequency came down some, but the total cost, it didn't move very much.

Mark Marcon -- Baird -- Analyst

So it was around 6.5% up year-over-year?

Douglas S. Sharp -- Senior Vice President of Finance, Chief Financial Officer and Treasurer

I don't -- yes, I don't have the percentage Mark in front of me, I'm sorry.

Mark Marcon -- Baird -- Analyst

Okay.

Paul J. Sarvadi -- Management Director, Chairman and Chief Executive Officer

Total trend was just over four for the year.

Mark Marcon -- Baird -- Analyst

Okay. And in terms of the number of claims that you're seeing at the 50,000 and above in the 250,000 and above, can you give us any sense for that. And I meant, clearly sounds from all of our prior conversations like there is an usual random elements in terms of what you've seen, but there are obviously, industry sources that would point to higher healthcare cost for higher level of claims. And so I'm wondering what's the possibility that the higher cost claims actually increase next year relative to this year in terms of the 50,000 to 250,000 range?

Paul J. Sarvadi -- Management Director, Chairman and Chief Executive Officer

I think, that's a good question, Mark. I think what we have to rely on for that is the comparisons we have in our ongoing dialog with our outside benefit consultant, our team internally and United. And it's clear from their discussions with them that if you go back, we went from 2018 kind of being under the average of these types of claims to being over that average, and now we are coming down back toward that average. So is it possible -- it could be -- nobody thinks there would be another step-up increase on top of this huge step-up we had this year, a compounding type of thing. That's why even the percentage increase in claims of 3.5% to 4.5% trend that we're applying is on top of this large trend from last year in total claims. So, we -- the team I think is confident, we've got a good handle on that and are being conservative as we look forward.

Operator

Your next question comes from the line of Tobey Sommer from SunTrust. Your line is open.

Tobey Sommer -- SunTrust -- Analyst

Thanks. So with respect to worksite employee growth, what's the numeric impact of the January catch up on your annual WSE guidance?

Paul J. Sarvadi -- Management Director, Chairman and Chief Executive Officer

Let's see, so that's kind of hot off the presses, but we -- the catch-up from the sales effort -- of course, it will roll in over the next 90 days, but it was several thousand employees.

Tobey Sommer -- SunTrust -- Analyst

Right. So is that a percentage point on the annual number? And what does that equate to?

Paul J. Sarvadi -- Management Director, Chairman and Chief Executive Officer

Yes, I think it's -- I think that's part of what we factored into roll into going up from six to the seven on average for the year. And gives you the range of six to eight even though we're starting around that six number.

Tobey Sommer -- SunTrust -- Analyst

Okay. And then in terms of managing the growth and trying to reaccelerate it you talked about BPAs up 11% is kind of a go. Why not try to jack that up to the mid-teens or pull a couple of office openings out of the 2021 plan and put them into '20 to give you kind of more cushion and more firepower?

Paul J. Sarvadi -- Management Director, Chairman and Chief Executive Officer

Yes, that's a good question. We've -- what we find ourselves, as you remember, we had a 14% increase in trained BPAs in the fourth quarter. And we feel like we can have a decent efficiency increase as they mature through this year and can let it slowly come down some to that 11% number. And that will have a favorable boost to growth, we feel good about that. If you added a lot more BPAs on top of the growth we expect for this year, you have all the added cost upfront and we felt like balancing everything. This was the appropriate plan.

Operator

We have another question from Jim Macdonald from First Analysis. Your line is open.

Jim Macdonald -- First Analysis -- Analyst

Yes, just one. Sometimes in the fourth quarter, you get people on the high deductible plans kind of using heavily. I don't think you mentioned, whether that was an issue in the fourth quarter, and I just wanted to check on that.

Paul J. Sarvadi -- Management Director, Chairman and Chief Executive Officer

Yes, I think that's always a part of your fourth quarter you expect people to have reached their -- even the people on high deductible plan many times have reached their limits. But I think that's factored into our normal seasonality and I wouldn't call it out as an unusual occurrence for this recent fourth quarter.

Jim Macdonald -- First Analysis -- Analyst

Okay. Just wanted to check on that. Thanks.

Paul J. Sarvadi -- Management Director, Chairman and Chief Executive Officer

Thank you.

Operator

We have a follow-up question from Mark Marcon from Baird. Your line is open.

Mark Marcon -- Baird -- Analyst

On the mid-market client losses, to what extent did they -- the ones that weren't acquired when they left for cost pressures? Did they go to other PEOs? Or what did they end up doing?

Paul J. Sarvadi -- Management Director, Chairman and Chief Executive Officer

Yes, that's a good question. In the analysis, when we looked at the whole book of business, the same percentage of customers ended up at competitors as we had last year. In fact, I think one year, it was 40% -- a 41% the previous year and 40% this year. Of course, it's 40% of a higher number. So yes, some more work to competitors, but you still had about a 60-40 between kind of taken things back in-house compared to go into another PEO.

Mark Marcon -- Baird -- Analyst

And from a pricing perspective, Paul, what was the -- like, how much higher were the prices relative to what it would have cost, where they would have said we'll stay? Or how do we think about that? And then...

Paul J. Sarvadi -- Management Director, Chairman and Chief Executive Officer

Yes, those are the battles in the trenches that you go through and you kind of have to try to figure that out. We'll reassess all that. It was hand-to-hand combat through the fall on a case-by-case basis. And we do make pricing concessions to keep customers like everybody does. What about things we highlighted is maybe we can have some process improvement to see those customers earlier, start them out at a little bit lower price, so that maybe we don't get into that intensive debate or have our process work better. So that we're quicker to react, so it doesn't take as long to get to an ultimate price and bring in competition or whatever else -- what other options they are considering. So, those are things that we're looking at that you do in a debrief. And we've got the teams look at that will be tuned and all that up. And I'll probably report about the improvements we're make in mid-market as the year progresses.

Operator

We have a last follow-up question from Tobey Sommer from SunTrust. Your line is open.

Tobey Sommer -- SunTrust -- Analyst

Thanks. If you could refresh me on what your assumed contribution is to WSE growth from net hiring in the customer base and how that figure compares to the higher levels you've seen in recent years?

Douglas S. Sharp -- Senior Vice President of Finance, Chief Financial Officer and Treasurer

Yes. So I mentioned that it was fairly consistent with 2019. And that's a percentage, we generally look at that in our assumptions as a percentage of the base at the end of the prior year. So as a percentage of the December numbers in the two years, it's very consistent. And so, in spite of the fact that we had a tight labor market in 2019 period, we're unsure, obviously, what that factors -- kind of how that's going to play in 2020 but we assumed a similar low level. Because historically, 2019 was a lower level of contribution in that particular area that we've received in prior years, particularly when they kind of have been strong like it has been.

Tobey Sommer -- SunTrust -- Analyst

Right. So what was that number, Doug, in '19?

Paul J. Sarvadi -- Management Director, Chairman and Chief Executive Officer

We didn't really provide that number we are just trying to give you the feel for it. Generally speaking, it was of course lower than we expected and lower than the prior year due to the difficulty in finding people to fill the jobs. And so, we've continued that same consideration into 2020.

Operator

We no longer have any questions on queue. I would like to turn the call over back to Mr. Sarvadi. Please go ahead, sir.

Paul J. Sarvadi -- Management Director, Chairman and Chief Executive Officer

Well, once again, we thank you all for participating on the call today. And we look forward to seeing you out at conferences or when we get out on the road, and we look forward to talking to you again next quarter. Thank you very much.

Operator

[Operator Closing Remarks]

Duration: 51 minutes

Call participants:

Douglas S. Sharp -- Senior Vice President of Finance, Chief Financial Officer and Treasurer

Paul J. Sarvadi -- Management Director, Chairman and Chief Executive Officer

Jim Macdonald -- First Analysis -- Analyst

Jeff Martin -- Roth Capital Partners -- Analyst

Mark Marcon -- Baird -- Analyst

Tobey Sommer -- SunTrust -- Analyst

More NSP analysis

All earnings call transcripts

AlphaStreet Logo