Alignment Healthcare, Inc.

Good afternoon, and welcome to Alignment Healthcare's fourth quarter 2025 earnings conference call and webcast. All participants will be in a listen-only mode. After instructions after today's presentation, there will be an opportunity to ask questions. Operating instructions, please note that this event is being recorded. Leading today's call is John Cahill, founder and CEO, and Jim Head, 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 these forward-looking statements are discussed in more detail in our filings with the SEC, including the risk factors, sections of our annual report on Form 10-K for the fiscal year ended December 31, 2025. 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 we believe are important in evaluating performance. Details on the relationship between these non-GAAP measures to the most comparable GAAP measures and reconciliations of historical non-GAAP financial measures can be found in the press release that is posted on our company's website and in our form 10-K for the fiscal year ended December the 31st, 2025. I would now like to hand the conference over to John Kayo, founder and CEO. You may begin.

Hello, and thank you for joining us on our fourth quarter earnings conference call. For the fourth quarter 2025, health plan membership of 236,300 represented year-over-year membership growth of approximately 25%. This supported total revenue of $1 billion, which grew 44% year over year. During the fourth quarter, we also exceeded the high end of guidance across each of our profitability metrics. Adjusted gross profit of $125 million represented an adjusted MBR of 87.7%. Meanwhile, adjusted EBITDA of $11 million solidly surpassed our guidance range of negative $9 million to negative $1 million. For the full year, total revenue of 3.9 billion grew 46% year over year. Adjusted gross profit of 495 million resulted in an MBR of 87.5%, representing an improvement of 130 basis points year over year. Taken together, this year marks a tremendous milestone in the maturation of our company's profitability. We transformed from roughly break even just 1 million in adjusted EBITDA in 2024 to delivering adjusted EBITDA of 110 million in 2025. This reflects an adjusted EBITDA margin of 2.8% and represents 270 basis points of margin expansion year-over-year. Throughout the course of 2025, we have demonstrated both the strategic and operational advantages of our clinically-centric model. which is purpose-built to deliver the highest quality care at the lowest cost. The data insights provided by our AVA technology platform, combined with our Care Anywhere clinical model, provided us with the visibility and control necessary to navigate a year of significant disruption where we overcame the second phase end of the V28 risk model, a redesign of the Part D program, and broad utilization pressures across the Medicare Advantage industry. And importantly, this allowed us to pursue growth while expanding margins, even as competitors took a step back in 2025. I'd like to congratulate our team for their success and recognition by Fortune Magazine for their unwavering commitment to seniors, which named us to its world's most admired companies list for the first time. We believe our model of lowering costs by delivering more care to seniors, not less, is the MA model of the future, and we are eager to serve more seniors as we continue along our path towards a million members. 2025 also marked an important step in demonstrating the replicability of our model beyond California. We more than doubled our ex-California membership while consistently exceeding our financial expectations throughout the course of the year. As of December 2025, we had approximately 38,000 members across our markets outside of California, representing approximately 16% of our total membership. We have grown confidently outside of California by first leading with quality, which starts with success and star ratings. We now have a five-star plan in North Carolina for the third consecutive year, two five-star plans in Nevada, a four and a half-star plan in Texas, and a four-star plan in Arizona. These achievements are further supported by the portability of our Care Anywhere clinical model, which focuses on delivering care to our high-risk polychronic members. By leveraging the strength of our care model, quality of clinical outcomes, and scalability of our health plan operations, we are unlocking the growth potential within these markets. We are now focused on sustaining the momentum of our ex-California markets. In 2026, we plan to invest in our sales and distribution engine, build deeper relationships with our broker partners, and continue growing with aligned provider partners where we have durable relationships. With less than 4% market share across our 23 counties outside of California, we see significant opportunity to take share over the coming years. Turning to our 2026 AEP results, we grew to 275,300 health plan members in January of 2026, representing 31% growth year over year. We saw broad growth across each of our markets with 23% growth in California and more than 80% growth in our ex-California counties. Importantly, we focused on growing responsibly through our bid design and sales strategy. We drove nearly 20% improvement to our AEP voluntary disenrollment metric and sourced approximately 80% of our gross sales from planned switchers. By taking a balanced approach to growth and profitability this year, we remain mindful of the impact of the final phase-in of D28, while still capitalizing on the growth opportunity in a year of significant disruption. Taken together, we are pleased with the solid growth in California while continuing our rapid expansion outside of California. Our growth this year is adding to our future embedded earnings potential while supporting our near-term operating leverage objectives. Meanwhile, improved operating efficiency across the enterprise is creating additional capacity to reinvest in long-term projects and scalability initiatives. Each of these factors is giving us confidence in our initial full-year adjusted EBITDA guidance range of $133 million to $163 million. This is consistent with our previous expectations for consensus adjusted EBITDA of approximately $145 million to be in the range of our initial 2026 outlook. GM will expand further on our financial outlook in his remarks. Looking beyond 2026, I'd like to spend a few minutes on the 2027 advance rate notice. On a net basis, the announcement appeared to indicate a relatively flat rate environment for the industry. This reflected a combination of underlying cost trends and policy changes. While we have heard disappointment across the industry, We believe the update is largely consistent with the CMS focus on program integrity and aligning payments with underlying costs. Specifically, we are encouraged that benchmark trends reflect continuing growth in costs within the fee-for-service population. This was partially offset by certain policy adjustments, including those related to skin substitutes. As it relates to unlinked chart reviews, we have long supported excluding these records from risk score calculations as part of improving program integrity. Of note, our exposure is limited. Approximately 1% of our total HCC value is derived from chart reviews of any kind. Within that category, an even smaller subset is related to unlinked chart reviews. For those, we believe we have a clear path to ensuring the diagnoses are supported by a linked claim or encounter over time. Most importantly, the current environment reinforces the importance of our strong clinically-led model and core medical cost management competency. We believe this enables us to win in any rate environment, just as we have demonstrated in 2024 and 2025, where the industry experienced tighter reimbursement. And furthermore, we will continue to have STARS payment advantages in 2027 with 100% of our members and plans rated four stars or above. In closing, we believe we are entering a reimbursement environment that creates a more level playing field with our competitors, which allows our distinct care management model to shine. We are proving the effectiveness of our distinct medical cost advantages with the results we have shared with you over the past two years. While we're pleased with our performance, we're not done yet. 2026 will be a year of continuous improvement where we plan to make targeted investments across our clinical model, new market playbook, and scalability initiatives, including investment in AI workflows to improve administrative efficiency. In doing so, we are balancing our near-term financial objectives with unlocking the embedded potential of our model. With that, I'll turn the call over to Jim to further discuss our financial results and outlook. Jim?

Thanks, John. I will jump right in with our 2025 results. For the year ending December 2025, health plan membership of 236,300 increased 25% year over year. Growth in membership drove total revenue to $3.9 billion for full year 2025, representing 46% growth year over year. Full year adjusted gross profit of $495 million represented an MBR of 87.5%, an improvement of 130 basis points year over year. We ended the year with strong outcomes across all major cost categories. Of note, Part D profitability and supplemental expenses trended in line with our guidance expectations. Meanwhile, our proactive care approach again delivered strong outcomes, leading to inpatient admissions per thousand in the low 140s during the fourth quarter. Taken together, the strength of our performance across each of these medical cost categories and the durability of our clinical model are giving us confidence in our underlying bid assumptions as we step into 2026. Moving to operating expenses, our operating cost ratios continue to demonstrate significant year-over-year improvement as our operational infrastructure scaled to support our new members. Full year 2025 GAAP SG&A was $443 million. our adjusted SG&A was $385 million, an increase of 28% year over year. Adjusted SG&A as a percentage of revenue declined from 11.1% in 2024 to 9.7% in 2025, representing an improvement of approximately 140 basis points. Taken together, we delivered full-year adjusted EBITDA of $110 million, and an adjusted EBITDA margin of 2.8%. This represents 270 basis points of margin expansion year over year. Turning to cash flow in our balance sheet, we generated positive free cash flow in 2025 and ended the year with $604 million in cash and investments. Subsequent to the quarter, today we announced the close of a $200 million revolving credit facility. This facility is simply good housekeeping. and further evidence of the maturation of our capital structure. We do not expect to draw on the credit facility in the near term, and our increasing positive free cash flow position allows us to support our organic growth objectives. Moving to our guidance. For the full year 2026, we expect health plan membership to be between 292,000 and 298,000 members. revenue to be in the range of $5.14 billion to $5.19 billion, adjusted gross profit to be between $615 million and $650 million, and adjusted EBITDA to be in the range of $133 million to $163 million. For the first quarter, we expect health plan membership to be between 281,000 and 285,000 members, Revenue to be in the range of $1.21 billion to $1.23 billion. Adjusted gross profit to be between $138 million and $148 million. And adjusted EBITDA to be between $26 million and $36 million. As it pertains to our full year expectations, given the strength of our OEP results and continued stability with our retention, we are raising our year-end membership guidance by 2,000 members at the midpoint relative to the commentary we provided in our January 8K. Moving to revenue, the midpoint of our initial revenue guidance range of $5.16 billion represents 31% growth year-over-year. The expected year-over-year increase to our revenue is primarily driven by our membership outlook. Meanwhile, our underlying revenue PMPM assumptions are balanced by increases to benchmark rates and the Part D direct subsidy. This is partially offset by the impact of the final phase-in of B28 risk model changes and mix of growth outside of California, which carries modestly lower per-member revenue. Turning to adjusted gross profit, our $633 million guidance midpoint implies an MBR of 87.7%. The outlook contemplates improvement from the retention of existing members and modifications to our product designs within markets to reflect the current reimbursement environment. These tailwinds are balanced by the third phase in of V28 and our new member mix, which is disproportionately represented by LIS, dual eligible, and CSNIP eligible members. Caring for these complex members is core to our clinical model, but they typically join with higher MBRs in year one as we transition them from an unmanaged setting to our care model. Additionally, as a reminder, we do not incorporate any assumption for sweep pickup from new members in our initial 2026 guidance. In 2025, this pickup was a benefit of approximately $14 million to our full-year adjusted gross profit and EBITDA, or roughly 30 basis points to our consolidated MBR. Moving to SG&A, we forecast further improvement in our SG&A expense ratio. We expect to achieve operating expense scale economies resulting from both membership growth and enhancements to administrative workflows. As John mentioned earlier, we also plan to reinvest a portion of the savings derived from improved operating efficiency towards further advancements in our clinical model, new market activities, and technology infrastructure to prepare for scaling our business and the deployment of AI workflows in the future. Taken together, we expect to deliver adjusted EBITDA of 133 to 163 million, consistent with our preliminary profitability comments provided earlier this year. Turning to our seasonality expectations, we expect a modestly lower MBR in the first half of the year compared to the full year average. Conversely, we expect the second half of the year to be slightly higher versus the full year average. Our initial view generally reflects the regular seasonality of our Part C MBR experience combined with a flatter slope to our Part D MBR in 2026. In conclusion, the 2025 execution of our clinical model, the replicability of our results across markets, and the consistency of our operating performance all give us tremendous confidence as we enter 2026. We are excited for the significant growth opportunity in the years ahead and are determined to make the right investments in people, processes, and technology to ensure that we are scaling responsibly. With that, let's open the call to questions. Operator?