1、U.S. Investment Research MORGAN STANLEY This memorandum is based on information available to the public. No representation is made that it is accurate or complete. This memorandum is not an offer to buy or sell or a solicitation of an offer to buy or sell the securities mentioned. Morgan Stanley by
2、our estimates, ASF ranks second, VCAM sixth, and ESOL eighth. All other companies on the Top 10 PEO list are either privately held or subsidiaries of large corporations. The combined equity market capitalization of the three public “pure play” companies is only about $1.5 billion currently. Administ
3、aff offers the business model with the least financial risk and greatest potential for rapid geo- graphic expansion among the publicly traded “pure play” PEOs. Due to its approach to managing workers compensation and health insurance for worksite employees and the expe- rience gained from a longer p
4、eriod operating in a larger number of geographic markets, Administaff possesses a business model with less financial risk than its publicly traded competitors and greater potential for successful rapid buildout across the United States, we believe. Administaff uses guaranteed cost indemnity insuranc
5、e cov- erage for workers compensation and healthcare. This ap- proach stands in stark contrast to the approaches of its publicly traded rivals, Vincam and Employee Solutions. The latter is entirely self-insured for workers compensa- tion and health insurance. Vincams historical approach was to combi
6、ne self-insurance for workers compensation with an in-house managed care network for health insur- ance. Both Employee Solutions and Vincams approaches lead to lower actual reported expenses for these direct costs, thereby raising reported gross margins. However, due to the high deductible per incid
7、ent and potentially open-ended exposure in terms of number of claims, the self-insured and PPO approaches expose the PEO to a large amount of diffi- cult-to-quantify risk against which reserves must be booked. As such, it is difficult for outside analysts to assess the degree to which a PEO that is
8、self-insured or in a PPO arrangement is adequately reserved. Perhaps for this rea- son, Vincam recently announced its intention to adopt for workers compensation guaranteed cost indemnity insur- ance coverage from the same provider used by Administaff. Aside from the uncertain financial risk created
9、 by self- insurance arrangements, a PEO using a PPO to limit costs in a self-insured medical arrangement faces the challenge of constraints to rapid extendability into new geographic markets. A managed care PEO must seek out medical practices and facilities to join its PPO network whenever it seeks
10、to enter a new geographic market. This recruitment process can be quite time-consuming, often taking a year or more to build a local PPO network in the new market. By contrast, a PEO using a guaranteed cost indemnity insur- ance plan can typically enter a new geographic market by providing 30 days n
11、otice to its insurance carrier so that a proper insurance plan for the new geography may be drawn up. Consequently, a PEO with a guaranteed cost health insurance plan such as Administaff should gain significant first mover advantages versus its PPO network-dependent competitors in the race to become
12、 the first truly national PEO service provider. Managements customer acquisition strategy of “cherrypicking” should lead to superior shareholder value creation per worksite employee. MORGAN STANLEY3 This memorandum is based on information available to the public. No representation is made that it is
13、 accurate or complete. This memorandum is not an offer to buy or sell or a solicitation of an offer to buy or sell the securities mentioned. Morgan Stanley (2) the IRS does not accept the inclusion of worksite employees in a PEOs 401(k) plans but applies that rule only prospectively, not affecting the tax-qualified status of the 401(k) plans in the past; or (3) the IRS does not accept the inclusion o
