Alignment Healthcare, Inc.

Good afternoon, and welcome to Alignment Healthcare's second quarter 2024 earnings conference call and webcast. All participants will be in a listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1-1 on your telephone. You will then hear an odd and amazing message advising that your hand has been raised. To withdraw your question, please press star 1-1 again. Please be advised that today's conference is being recorded. Leading today's call are John Kao, founder and CEO, and Thomas Freeman, chief financial officer. Before we begin, we would like to remind you that certain statements made during this call will be forward-looking statements as defined by the Private Securities Litigation Reform Act. These forward-looking statements are subject to various risks and uncertainties and reflect our current expectations based on our beliefs, assumptions, and information currently available to us. Descriptions of some of the factors that could cause actual results to differ materially from those forward-looking statements are discussed in more detail in our filings with the SEC, including the risk factors section of our annual report on Form 10-K for the fiscal year ended December 31, 2023. Although we believe our expectations are reasonable, we undertake no obligation to revise any statements to reflect changes that occur after this call. In addition, please note that the company will be discussing certain non-GAAP financial measures that they believe are important in evaluating performance. Details on the relationship between these non-GAAP measures to the most comparable GAAP measures and reconciliation of historical non-GAAP financial measures can be found in the press release that is posted on the company's website and in our Form 10-Q for the fiscal quarter ended June 30, 2024. It is now my pleasure to introduce founder and CEO, John Kao.

Hello, and thank you for joining us on our second quarter earnings conference call. For the second quarter 2024, our health plan membership of 175,100 members represented approximately 56% growth year over year and outperformed our year-end membership guidance of 170 to 172,000 members. Total revenue of 681 million grew approximately 47 percent year-over-year and 58 percent excluding ACO reach. Adjusted gross profit of 77 million produced a consolidated NBR of 88.7 percent, which led to our adjusted EBITDA of positive 6 million in the quarter. Both our adjusted gross profit and adjusted EBITDA achieved the high end of our second quarter guidance, which places us on track toward our full year adjusted gross profit and adjusted EBITDA guidance ranges. As we round out the first half of the year, I'm proud of what the team has accomplished. Over the past several years, we increased investments in member experience, clinical infrastructure, distribution, and our unified data platform AVA to realize our vision of Medicare Advantage done right. These investments provide us with the visibility and control required to manage our markets in real time, resulting in both exceptional growth and superior MBR outcomes. We continue to believe our platform is the model for the future of Medicare Advantage, and our year-to-date results reinforce my optimism about our replicability and scalability over time. During the second quarter, we continued to drive membership growth ahead of expectations. Our sustained growth momentum was enabled by strong product offerings resulting from our virtuous cycle, which reinvest savings from our unique ability to manage medical costs into richer benefit offerings. This was further supported by robust broker engagement activity, and our expanding reputation for clinical quality and a superior member experience. Heading into this ADP, we continue to deepen strong relationships with our broker partners as we become the household name for seniors seeking the best quality at the lowest cost. From a retention standpoint, our member experience investments last year resulted in our voluntary disenrollment rate improving roughly 22% year over year. We achieved this while improving service levels and seamlessly onboarding approximately 63,000 net members in the last 12 months, demonstrating the scalability of our platform. Our 56% growth year over year makes us one of the fastest growing MA plans in the nation, and we believe the only MA plan that has demonstrated an ability to both grow membership rapidly and manage MBR. As we have said before, we are focused on profitable growth. This is enabled by our visibility and control over the value drivers required to manage our MBR, STARS, risk adjustment, medical management, product development, and provider engagement. These capabilities resulted in continued utilization outperformance in the second quarter, including inpatient admissions per thousand, of 151, which is approximately in line with the prior quarter. Our MBR result in the second quarter is a continuation of the momentum we achieved in the first quarter, where we grew 51% year over year, while MBR increased just 1.5%. As a reminder, new members typically join at a higher MBR, meaning faster growing plans with a higher mix of new members, typically see a greater increase in MBR year over year. To put our performance into perspective, the average publicly traded national health plan grew Medicare Advantage members just 2% year over year, while MBR still increased by 2.8% in the first quarter as the industry faced utilization stars and risk adjustment challenges. Our differentiated results shared here are further highlighted in the latest investor presentation available on our investor relations website. While we are pleased with our MBR performance to date, we are already driving innovation to improve our clinical outcomes through pre-service care navigation, post-discharge case management, and IPA performance improvement, all of which we believe will continue to improve our MBR results in the future. Turning to our preparation for 2025, we believe we are well positioned to deliver at least 20% growth next year and adjusted EBITDA profitability through MBR improvement and continued SG&A leverage. Our confidence in our ability to achieve both objectives is underpinned by our margin-focused bid process and our competitive advantages heading into 2025. We have added more members than any other health plan in California in 2024, and our growing market presence is increasing our competitive advantages. In addition to supporting our enterprise operating leverage objectives, our size and market share gains enhance our local competitive position by increasing mind share with brokers, collaboration with providers, and reputation among seniors. Even with our strong growth, our California market share stands at only 4.5%, leaving us significant room to expand further. Over the long term, we believe we can capture at least 20% share across our California markets, similar to what we've achieved in some of our most mature counties. In 2025, we plan to fully capitalize on our position in California, where we have relative advantages on stars and risk model changes. Even after accounting for the recent CMS star rating changes, there are still approximately 1.2 million total California seniors and HMO plans below four stars were not rated. Given our position with roughly 95 percent of our California members and plans that will still have four-star payment level, we anticipate a unique opportunity to capture strong growth while remaining focused on margin expansion. Outside of California, we have more than doubled our membership year over year and continue to demonstrate our commitment to quality. The recent update to CMS star ratings for payment year 2025 awarded us a five-star rating in our North Carolina and Nevada markets. By first focusing on stars and clinical outcomes, we have built a strong foundation that gives us long-term competitive advantages. As we move toward consolidated profitability, we will be able to deepen our investments in these newer markets. When combined with our investments in our shared services infrastructure and our ability to scale, we see a significant opportunity to accelerate and sustain growth in these newer markets over time. Given our competitive strength in our existing markets are focused on profitability and our solid positioning to achieve at least 20% growth, we will not enter any new states in 2025. However, we expect to prioritize further market expansion in future years while committing to sustained profitability. In conclusion, I'd like to thank each of our employees for their part in pioneering the Medicare Advantage model of the future. Tens of thousands of new members are choosing Alignment as their senior healthcare partner this year, making us one of the fastest growing plans of the nation. However, we're just barely scratching the surface for the millions of seniors who need our help. And I believe we will make further inroads toward our vision for Medicare done right in 2025. I'll look forward to sharing more as we get closer to AEP. And now I'll turn the call over to Thomas to further discuss our financial results and outlook.

Thomas? Thanks, John. For the quarter ending June 2024, our health plan membership of 175,100 increased 56% year over year, outperforming our expectation for 50% membership growth at the midpoint of our second quarter guidance range. Our second quarter revenue of $681 million represented 47% growth year-over-year and 58% growth excluding ACR REACH. As John described, our value proposition and reputation for quality, service delivery, and provider and broker partnership continue to expand in our local markets, setting us up with positive momentum heading into this AEP. Adjusted growth profit in the quarter was $77 million, representing an MBR of 88.7% and a 220 basis point improvement from the first quarter. For the second quarter in a row, we are demonstrating that industry-leading membership growth can be balanced with strong MBR performance if you have a model with differentiated visibility and control. Second quarter utilization experience continued to trend within our expectations, with inpatient admissions per thousand of 151 continuing to drive our overall MBR performance. While we believe our inpatient admissions per thousand performance continues to lead the industry, we still see significant room for improvement in the back half of the year, which I will expand on shortly. Our utilization performance was partially offset by the overall increasing mix of new members from our strong growth outperformance who are still being on board on our clinical programs. As we previously mentioned, we are also continuing to navigate heightened levels of supplemental benefit expense and atypically high unit cost increases in 2024, both of which will improve in 2025. As we close out the second quarter, it's worth noting that we now have sufficient paid claims visibility on our first quarter dates of service experience to more fully assess our T1 performance. Given our overall volume of new membership, we are pleased to report that we remain confident in our first quarter incurred but not paid, or IB&P accruals, implying both accuracy in our initial assessments as well as stability in our overall reserves. Turning to OPEX, SG&A in the quarter was $88 million. Our adjusted SG&A was $71 million, an increase of 27% year-over-year. Adjusted SG&A as a percentage of revenue, excluding ACR REACH, declined from 12.9% to 10.4% year-over-year improving by approximately 250 basis points and exceeding our Q2 operating leverage expectations. Taken together, our adjusted EBITDA was positive $6 million in the quarter, achieving the high end of our outlook range and placing us on track towards our full-year adjusted EBITDA guidance. Lastly, we ended the quarter with $364 million in cash investments. Moving to our guidance, for the third quarter, we expect health plan membership to be between 176,000 and 178,000 members, revenue to be in the range of $655 million and $665 million, adjusted gross profit to be between $75 million and $81 million, and adjusted EBITDA to be in the range of $0 to positive $6 million. For full year 2024, we expect health plan membership to be between 178,000 and 180,000 members, revenue to be in the range of $2.61 billion and $2.64 billion, adjusted gross profit to be between 280 million and 310 million, and adjusted EBITDA to be in the range of a loss of 12 million to positive 12 million. We have raised our year-end membership guidance by an additional 8,000 members based on our year-to-date outperformance and our expectation for continued growth momentum in the second half, which further drives the increase in our full-year revenue outlook. Since our initial expectations in January, the midpoint of our membership guidance range has increased by 16,000 members. Our outlook now implies membership growth of 50% at the midpoint versus our initial guidance of 37% and revenue growth excluding ACO reach of 54% at the midpoint versus our initial guidance of 41%. Turning to profitability, our guidance remains unchanged in spite of our higher growth outlook. We are pleased with the results of our operational initiatives investments in automation, and the continuous improvement of our clinical model. These efforts have resulted in improved SG&A scale economies and closely managed MBR, giving us confidence in our full-year adjusted EBITDA guidance. Specifically on adjusted gross profit, we expect the added gross profit dollars from our incremental membership to be offset by a continued uptick in our supplemental benefit expense, which we have captured in our 2025 bids. These two factors result in an applied 50 basis point MBR increase to our prior guidance. The midpoint of our guidance range now represents an MBR of 88.8%, which we are very well positioned to offset with SG&A scale economies. From a utilization standpoint, our engagement rate of care anywhere eligible among new members remains on target through the first half of the year. We still see significant opportunity remaining in the second half as we work toward achieving our expected year-end engagement rate of 60% from our current level of approximately 30%. As a reminder, we typically see a 30% improvement in an institutional claims PMPM in the 12 months following engagement compared to our control group of members that have not yet engaged. Accordingly, we see an opportunity to improve our utilization performance as we continue to onboard our new membership and ramp up new member engagement in the back half of the year with a particular eye towards the fourth quarter. Further, as John commented on previously, we continue to see opportunity on cost management beyond the inpatient setting and are ramping up our efforts on both pre-service care navigation, post-discharge case management, and IPA performance improvement to continue to improve our overall MBR. On SG&A, our first half results demonstrate the scalability of our model with adjusted SG&A as a percentage of revenue excluding ACO reach declining by 200 basis points year over year. We continue to expect even greater improvement in the second half since we will not have the impact of one-time costs incurred last year related to the insourcing of our member experience function and the acceleration of AEP growth and staffing expenses. In conjunction with the increase in our membership outlook, our full-year guidance now implies an adjusted SG&A as a percentage of revenue of 11.3%, representing roughly 300 basis points of improvement year-over-year, excluding ACO reach. This improvement includes commissions and other variable expenses related to incremental growth. As we look toward 2025, we are increasingly excited about the growth and margin opportunity in front of us that will be supported by a number of tailwinds. First, our growth momentum in 2024 adds to our scale advantages and mindshare with brokers in the upcoming AEP. Second, we believe we have appropriately captured our 2024 higher supplemental benefit expense experience in our 2025 bids. Third, our weighted average benchmark increase of 5% relative to the national average of 2.4% will make us whole for the outsized unit cost increases we are currently absorbing in 2024. Finally, our relative advantages on STARS and the second phase in of the V28 risk model changes will further our competitive positioning. In summary, the combination of these factors positions us strongly towards driving adjusted EBITDA profitability while achieving our growth target of at least 20% or greater next year. With that, let's open the call to questions. Operator?