Alignment Healthcare, Inc.

presentation, there will be an opportunity to ask questions. To ask a question during this session, you will need to press star 1-1 on your telephone. You will then hear an automated message advising you your hand is raised. To withdraw your question, please press star 1-1 again. Please note that this event 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 risk and uncertainties and reflect our current expectations based on beliefs, assumptions, and information currently available to us. Descriptions of some of the factors that could cause actual results to differ materially from these 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 31st, 2024. Although we believe our expectations are reasonable and 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 current comparable GAAP measures and reconciliation of historical non-GAAP financial measures can be found in a press release that is posted on the company's website and in our form 10-K for the fiscal year ended December 31st, 2024. I would now like to hand the call over to your speaker today, John Kao. Please go ahead.

Hello, and thank you for joining us on our fourth quarter earnings conference call. For the fourth quarter 2024, our health plan membership of 189,100 concluded a milestone year where we grew membership approximately 59%. Our final result is more than 25,000 members above the high end of our initial guidance range and reflects an additional 21% growth relative to initial expectations. As a result of our continued membership outperformance, total revenue of $701 million in the quarter grew approximately 51% year-over-year and 61% excluding ACL reach. In the fourth quarter, each of our key margin ratios improved year-over-year, even as our membership growth accelerated beyond expectations. Adjusted gross profit of $88 million produced a consolidated MBR of 87.5%. a 200 basis point improvement year over year, and 50 basis point improvement excluding ACO REACH. Combined with substantial scale economies, we delivered adjusted EBITDA positive 1 million in the quarter and 400 basis points of margin expansion year over year. For the full year, total revenue of 2.7 billion grew 48% year over year and 59% excluding ACO REACH. Adjusted gross profit of $303 million resulted in an MBR of 88.8%. Lastly, we delivered positive adjusted EBITDA of $1 million, which reflects 200 basis points of margin expansion year over year and marks our first year of adjusted EBITDA profitability as a public company. Our exceptional results in 2024 highlight our differentiated ability to navigate a dynamic MA environment and demonstrate that plans can win by providing more care, not less. Our success starts with approaching Medicare Advantage as a care management business, not just an actuarial underwriting business. To execute our model, we employ more than 400 clinical staff who represent approximately 25% of our full-time employees and roughly 4% of medical expenses for at-risk members. These home and virtual-based resources leverage actionable insights from AVA to create greater control over medical quality and costs. As a result, we were able to offer market-leading benefits and grow confidently in 2024, while others in the industry took a step back to rising star standards, the first year of V28 phase-in, and changes in utilization patterns. Taken together, the results of 2024 are demonstrating our ability to capitalize on a changing MA environment that will favor plans with low-cost, high-quality outcomes. Turning to our AEP results, we entered January 2025 with 209,900 health plan members, representing 35% growth year-over-year. This resulted from a combination of 28% growth in California and more than 100% growth in our ex-California markets. Much like 2024 was a breakout year for consolidated growth, 2025 is a breakout year for growth outside of California. Nevada now has over 10,000 members, while each of our other ex-California states have between 5,000 and 8,000 seniors. Our ex-California growth during AEP was enabled by our industry-leading STARS results, including our five-star contract in Nevada and North Carolina. and strong medical management performance, including 2024 admissions per thousand of 144 for ex-California markets. These factors increased reimbursement from CMS and lower costs by improving the health of our members, both of which allow us to afford richer product benefits. In total, our successful AEP provides us with line of sight to our full year membership guidance of 227,000 to 233,000 members, and further positions us to drive greater economies of scale and adjusted EBITDA margin improvement in 2025. Thomas will share more on our 2025 guidance shortly. Looking beyond 2025, we believe our relative advantages on STARS and the final phase-in of the B28 risk adjustment model create a multi-year pathway for robust growth and continued margin expansion. For 2025 payment year, 95% of our California members are in plans rated four stars or above compared to 68% for competitors in California. This is already 27% higher than competitors and our advantage is further widening for the 2026 payment year when we will have 100% of our California members in plans rated four stars or above. This will be nearly 40% better than the competitors in the state who are declining to just 61% of members in four star or above plans. We are similarly well positioned at a national level. Approximately 98% of all alignment members are in plans that will be rated four stars or above in payment year 2026, which is 34% better than the industry of just 64%. Beyond our rating year 2025 star scores, which impact our 2026 payment, we see multiple years of meaningful stars tailwinds ahead of us. For rating year 2026 impacting payment year 2027, caps and admin weightings will be reduced from 4 to 2. This change would have resulted in an increase to our raw score by approximately 0.23 during the past rating cycle for our California HMO contract. further reinforcing our STARS position. For rating year 2027 impacting payment year 2028, CMS is replacing the current reward factor with a health equity index. Our California HMO contract doesn't currently receive any benefit from the existing reward factor, so this change creates an additional potential tailwind to our raw STARS score. Based on our early analysis, we believe we could achieve a star score bonus of 0.25 or greater under the new health equity index. Each of these tailwinds increases our confidence in maintaining at least four stars and strengthens our conviction in growing membership 20% or above over the coming years while balancing margin expansion objectives. Lastly, I'd like to spend a moment to talk about the embedded gross margin opportunity within our existing membership. Due to our rapid growth in 2024 and 2025, over 50% of our members are expected to be in a year one or year two cohort. As we engage our at-risk members with our clinical resources, gross profit grows from $90 PMPM for our at-risk year one members to $230 PMPM for our at-risk members in year five and beyond. This dynamic creates embedded gross profit of approximately $600 million just within our existing membership base, creating a pathway to double the $300 million of gross profit we delivered in 2024 without any incremental membership growth. In closing, 2024 was a milestone year on growth and profitability improvement while we again demonstrated the resiliency of our STARS results. By prioritizing health outcomes and putting the senior first, we have created a durable cost and quality mode that positions us to win irrespective of the policy and rate environment. For their dedication to our seniors, I'd like to thank each of our employees for playing their part in fulfilling our mission for Medicare Advantage Done Right. With that, I'll turn the call over to Thomas to further discuss our financial results and outlook. Thomas?

Thanks, John. For the year ending December 2024, our health plan membership of 189,100 increased 59% year-over-year. This drove total revenue just north of $2.7 billion for full year 2024, representing 48% growth year-over-year and 59% growth excluding HCO REACH. As membership continued to accelerate during the year, we ultimately exceeded the midpoint of our initial 2024 revenue guidance by over $300 million. Full-year adjusted gross profit of $303 million exceeded the high end of our latest guidance by $6 million and represented an MBR of 88.8%. We continue to demonstrate the strength of our medical management capabilities during the fourth quarter with our MBR of 87.5%, marking our lowest MBR quarter of the year. Our strong finish drove our full-year inpatient admissions per thousand for our at-risk members to 149, showing continued improvement from 156 in 2023 and 159 in 2022. Our adjusted gross profit results in the fourth quarter also benefited from the release of prior period IV&P reserves. Given the atypically large cohort of new members we onboarded during 2024, we took a prudent approach to setting initial reserves during the first through third quarters. As we closed out the year, our favorable claims run out allowed us to deliver upside relative to our prior expectations. Our strong admission performance in 2024, combined with our latest visibility into our 2024 claims experience, together give us confidence in our 2025 outlook. Turning to OpEx, our operating cost ratios showed year-over-year improvement given our continued growth, and the elimination of one-time costs associated with the insourcing of our member experience functions that we incurred in the second half of last year. Full year 2024 SG&A was $371 million. Our adjusted SG&A was $301 million, an increase of just 23% year-over-year relative to membership growth of 59% year-over-year. Adjusted SG&A as a percentage of revenue excluding HCR reach declined from 14.4% in 2023 to 11.1% in 2024, represented an improvement of approximately 330 basis points. Taken together, we achieved our break-even profitability goal with full-year adjusted EBITDA of positive 1 million and did so while onboarding more net new members in 2024 than in the prior four years combined. This demonstrates the differentiated power of our model to scale outcomes and places us on track to drive continued adjusted EBITDA margin expansion in 2025. Turning to the balance sheet, we ended the year with $471 million in cash and investments. This includes net proceeds from the sale of 330 million aggregate principal convertible senior notes in the fourth quarter. The funds from this transaction were used to pay down $215 million in outstanding term loan principal and added $106 million of cash to the balance sheet net of transaction costs. This significantly lowers our cost of capital and reduces annual interest expense by approximately $10 million moving forward. Moving to our guidance, for the first quarter, we expect health plan membership to be between 211,000 and 215,000 members, revenue to be in the range of $880 million and $895 million, adjusted gross profit to be between $89 million and $97 million, and adjusted EBITDA to be between $2 million and $10 million. For the full year 2025, we expect health plan membership to be between 227,000 and 233,000 members, revenue to be in the range of 3.72 billion and 3.78 billion, adjusted gross profit to be between 415 million and 445 million, and adjusted EBITDA to be in the range of 35 million and 60 million. Given our strong sales momentum through the first two months of the year, we are raising the midpoint of our year-end health plan membership guidance by 2000 relative to our early guidance commentary provided in January. Our products continue to resonate across our markets and the strength of our early results give us confidence in our full year trajectory. Turning to revenue, the midpoint of our initial revenue guidance range of approximately 3.75 billion represents nearly 40% growth year over year. Beyond our strong membership growth, Our revenue outlook is supported by increases to our Part D revenue PMPM due to changes related to the Inflation Reduction Act and the retention of our 2024 new member cohort, partially offset by the impact of the second phase of the V28 risk model changes. Moving to our adjusted gross profit guidance, our midpoint of $430 million represents 42% growth year over year. This implies an NBR of 88.5%. and compounds off of our strong 2024 result where we grew adjusted gross profit by 45%. Our outlook embeds the MBR improvement from the retention of 2024 new members and modifications to our product design. These factors are balanced by the impact of the second phase in of the D20 risk model, initial assumptions on Part D changes associated with the Inflation Reduction Act, and modestly higher utilization volume expectations due to our mix of membership. Progressing down the P&L, We expect to see further improvement in our SG&A ratio as we continue to scale our back office functions and ex-California markets while driving automation and productivity improvements across our shared services. Taken together, the midpoint of our adjusted EBITDA guidance range of $47.5 million implies 130 basis points of margin expansion year-over-year and reflects our confidence in underlying cost trends and operating leverage opportunities in 2025. In terms of our first quarter guidance, it's worth noting that our MBR seasonality is anticipated to shift in 2025 due to changes related to the Inflation Reduction Act. Similar to prior years, we anticipate that our Part D MBR will improve sequentially throughout the year, however, at less of a slope than in years past. Accordingly, the change in seasonality will modestly lower MBR in the first half of the year and conversely increase MBR in the second half of the year relative to prior years experience, all else being equal. Beyond changes to Part D seasonality, our first quarter guidance broadly reflects our regular seasonality, which incorporates higher utilization in the first quarter of the year. In conclusion, our consistent strategy of balancing growth and profitability combined with our differentiating Medicare Advantage platform enabled us to deliver breakout performance in 2024. As we step into 2025 with momentum on growth and confidence in our 2025 outlook, We believe we are well positioned to continue distancing ourselves from competitors this year, as well as looking ahead to 2026 and beyond. With that, let's open the call to questions. Operator?