Intriguing Details of the Largest Public PEOs in 2020

Because people have more interesting ways to spend their time than to pour over financial statements, I have taken it upon myself to do just that. Below are some interesting observations after looking at annual reports from the largest publicly-traded PEOs. Unlike prior updates, this one will focus mostly on disclosed Risk Factors.

10-K as of Dates

The below numbers, unless otherwise noted, as based on the 10-Ks with the following year-end dates:

12/31/19 (TriNet, Insperity and BBSI), 5/31/20 (Paychex), and 6/30/20 (ADP).

Notable Changes

The only notable change between this set of 10-Ks and those from last year is that Insperity increased their WC deductible limit from 1.0M to 1.5M.

Risk Factors

Though rarely brimming with quantitative information, the risk factors section of the 10-K provides some of the most useful qualitative information about what concerns the company and what it may be doing to allay those concerns. I went through each company’s risk factor disclosures and grouped them into the following themes:

• Strategy: business transformation effects, workforce talent, activist shareholder, geographic concentration, negative impact of acquisitions, reputation, et al.
• Insurance: adverse WC or health claims experience, carrier failure, SUI rates, large deductible concerns
• Market: risk related to market, credit, and economy
• Data/IT: business continuity, intellectual property, outdated technology, data privacy, IT failure, financial reporting controls
• Regulation: mainly concerns about government regulation (e.g. PPACA)
• Client Actions: business and employee risk at the client level
• (NEW) COVID: impact of concern related to the COVID-19 pandemic

The below chart shows the distribution of risk themes for each PEO. For example, of all the risk factors disclosed by ADP, roughly 20% of them were related to Strategy as defined above.

The above chart is well and good for conveying the distribution and proportions of a PEO’s risk disclosures, but it does not convey a very important perspective – the relative importance of each risk factor.

For example, if Company X has ten risk disclosures and #1 and #2 are Strategy while #9 and #10 are Competition, the above chart would display 20% for both Strategy and Competition. But the rankings of each risk disclosure should be reflected as well.

The below chart does just that, by essentially calculating a weighted average such that higher ranked risk factors are given more weight than lower ranked risk factors. Do note that this is my own methodology and utilized purely for illustrative purposes and to provide a different perspective. The below chart and the underlying calculations are not found in the 10-Ks, nor are they approved or provided by the PEOs.

The “Relative Importance” chart brings to light several interesting observations:

• Small vs Large. Smaller firms appear to have more concerns about insurance and credit/market risks than their larger counterparts. Larger firms[1] appear more concerned with Data/IT and Regulation risks.
• Insurance Risk Extremes. ADP has no disclosed insurance-related risk factors[2]. In contrast, BBSI’s insurance risk represents more than 50% of its total risk disclosures.
• Credit/Market Extremes. Credit and market related risk was 10% or less for the three largest firms, but for BBSI and especially for Insperity they were one of the top two most prominent risks.
• Regulation In Front. A similar phenomenon for regulation risks. In the first chart, regulation risk represented 5-15% of total risk factors, but the second chart shows the upper end ballooning to 45%! The reason is that each firm only cited a few regulatory-related risks, but when they did the risks were all very highly ranked.
• COVID-19 Impact. Of the PEOs whose 10-Ks were issued after the pandemic had begun, ADP and Paychex each cited one risk disclosure related to COVID-19. One may note that the weight for Paychex is much larger than the weight for ADP in the above chart, as ADP listed its pandemic risk 11^th overall while Paychex listed its pandemic risk 1^st

Take-Aways

• The distribution of risk themes remain largely unchanged for all shown companies, with the exception of a new COVID-19 category.
• Of the PEOs whose 10-Ks were issued after the pandemic began, ADP listed the associated risk 11^th overall while Paychex listed it 1^st.
• All listed companies continue to utilize large deductible plans for their workers’ compensation risk, with most remaining at the same prior year’s limit except for Insperity increasing from $1.0M to $1.5M.

[1] We assume that the order of companies from left to right corresponds to larger to smaller total worksite employee count. That is, ADP has the most worksite employees and BBSI has the least of the five companies shown.

[2] Discussed in prior post – https://davies-group.com/northamerica/knowledge/intriguing-details-of-the-largest-public-peos-in-2019/