Good afternoon, and welcome to Alignment Healthcare's Third Quarter 2025 Earnings Conference Call and Webcast. [Operator Instructions] Please note that this event is being recorded. Leading today's call are John Kao, 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 risk and uncertainties and reflect our current expectations based on our belief, assumptions and information currently available. 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, 2024. 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 our company's website and our Form 10-Q for the fiscal quarter ended September 30, 2025. I would now like to turn the call over to John. John, you may begin.

Hello, and thank you for joining us on our third quarter earnings conference call. For the third quarter 2025, we exceeded the high end of each of our guidance metrics. Health plan membership of 229,600 members represented growth of approximately 26% year-over-year. Strong health plan membership growth supported total revenue of $994 million, increasing approximately 44% year-over-year. Adjusted gross profit of $127 million increased by 58% year-over-year. This produced a consolidated MBR of 87.2%, an improvement of 120 basis points over the prior year. Finally, our adjusted SG&A ratio of 9.6% improved by 120 basis points year-over-year. Taken together, we delivered adjusted EBITDA of $32 million, solidly surpassing the high end of our adjusted EBITDA guidance. Our third quarter results now mark the third consecutive quarter in which we surpassed the high end of our adjusted gross profit and adjusted EBITDA guidance ranges and raised the full year guidance. These results were underpinned by inpatient admissions per 1,000 in the low 140s and demonstrate the power of our ability to manage risk in Medicare Advantage by placing care delivery at the center of our operations. As we've demonstrated in 2024 and through our year-to-date performance in 2025, our unique model has positioned us to succeed amidst a paradigm shift in the industry marked by lower reimbursement and higher star standards. We continue to make investments that will improve operations to back-office automation, clinical engagement, AVA AI clinical stratification and Stars durability. These investments will further separate us from our competitors. For the full year, we now expect to deliver $94 million of adjusted EBITDA at the midpoint of our guidance range in 2025 compared to our initial full year guidance of $47.5 million at the midpoint. Jim will expand further on guidance in his remarks. Moving to Stars results, 100%…

Thanks, John. I'm pleased to share our results for the third quarter, which were underpinned by strong execution across the board. For the third quarter, health plan membership of 229,600 increased by 26% year-over-year. Revenue of $994 million increased by 44% over the prior year. Outperformance in our revenue growth was predominantly driven by continued momentum in our new member sales during the quarter. Third quarter adjusted gross profit of $127 million grew 58% compared to the prior year. This represented an MBR of 87.2% and improved by 120 basis points year-over-year. Outperformance of both adjusted gross profit and MBR was driven by a continuation of disciplined execution of our clinical activities. This drove inpatient admissions per 1,000 in the low 140s during the third quarter. Meanwhile, Part D modestly outperformed our expectations as growth in utilization trends moderated sequentially. Our Part D experience through the first 9 months of the year gives us confidence that all of the moving parts related to the IRA changes have been appropriately captured and that we are on pace to meet the Part D margin assumptions embedded within our guidance. Turning to our operating expenses. Adjusted SG&A in the third quarter was $95 million and declined as a percentage of revenue by 120 basis points year-over-year to 9.6%. The year-over-year improvement to our SG&A ratio was driven by the scalability of our operating platform. Additionally, we experienced a few million dollars of SG&A timing benefit in the third quarter that we expect to reverse in the fourth quarter, leaving our full year SG&A outlook roughly unchanged. Taken together, adjusted EBITDA of $32 million resulted in an adjusted EBITDA margin of 3.3% and represents 240 basis points of margin expansion compared to the third quarter of 2024. Moving to the balance sheet. We ended…

[Operator Instructions] Our first question comes from the line of Scott Fidel with Goldman Sachs.

First question, and John, appreciate the sort of early insight into the growth on 2026 likely to meet or exceed your 20% growth target. And I know you're not giving guidance at this point, but just curious around the comment that you made around the market share opportunities from industry disruption. And clearly, we know there's a lot of that right now for MA. How would you frame that in terms of thinking about that in the context of California versus the non-California markets?

Scott, yes, I'd say very, very pleased with across-the-board growth in California and really leveraging the 5 stars in North Carolina and Nevada. So, we're very pleased about the geographic kind of composition of the growth. I'd say even more importantly is kind of the product mix and the kind of provider networks that we think are very high performing and where the growth is actually occurring. And so, I think for all those reasons, we're very, very pleased just we're only 2 weeks into this thing. So, I don't want to get too far ahead of ourselves, but 2 weeks in, we're really pleased with it. The other thing I would just remind everybody, I know there's a concern that we're going to grow too much and we're going to pick up a bunch of bad business, et cetera, et cetera. I'm less worried about that simply because we had a 60% growth year in 2024. And not only do we onboard it well, we manage the risk really, really well. And I think we're proving that we can scale the clinical model and we can actually manage the polychronic population really, really well. And so, it's just a core competency that we have that I'm not sure others can replicate at this point. So, for all those reasons, I'm very pleased as to where we are.

Got it. And for my follow-up question, John, I know that at a recent industry conference, you had talked about considerations around potentially pursuing some M&A or sort of partnership opportunities on the vertical integration side to unlock the MLR opportunities, particularly associated with supplemental benefits. And just curious around how you think about weighing or balancing the opportunities that would be related to that, like improving the MLR versus the potential risks of sort of entering new markets that may have some different fundamental dynamics and then just maybe sort of moving away from sort of this sort of core strategy you've had that's clearly been working in terms of the focused strategy on MA.

Yes. No, good question, Scott. I'd say we're looking at a lot of different opportunities. And to your point, we're being very discerning. We're being very, very careful to the extent that there are tuck-in opportunities, I think we have to take those more seriously than others relative to, say, buying books of business in completely new markets. I think we're being very thoughtful about that. I would not worry about that part of it. What I said at a prior conference was around basically supplemental benefits and tuck-in acquisitions related to what we would call captives, ancillary captives. And when you talk about 4% to 5% of premium being really kind of applied to the supplemental business and supplemental products, it just makes sense for us to -- if we bought or started, say, some ancillary business, whether it'd be a dental PPO or a behavioral HMO or whatever it is, that we could seed it with 250,000 lives right off the bat kind of thing. And I think that there's going to be some margin improvement opportunity for us to do that. And I think we can do that with very little execution risk. Does that answer where you're going?

Yes, it does. Obviously, it's going to be an evolving story, but I appreciate that insight.

Our next question comes from the line of Matthew Gillmor with KeyBanc.

I want to follow-up on the 80,000 metric and the favorability on inpatient costs. I think last call, John, you talked about giving providers more tools and more data and also maybe moving some of the UM and inpatient risk back to Alignment's balance sheet. Can you just remind us where you are in terms of risk sharing with physicians in California? And how do you see that evolving during 2026 and beyond?

Yes. Matt, great question. We're about 65% to somewhere between 65% and 70% is in what we would refer to as our shared risk business. And what that represents is really where we're working with IPAs, particularly in parts of Southern California where we have shared risk arrangements where we're managing the inpatient -- we're at risk for the inpatient risk. And what we have done starting last year is really take on more of the UM component. And we've done that in a way that is resulting in better clinical outcomes and improved financial outcomes for our IPA partners. And so, it's kind of a win-win for everybody. And the other 1/3 of the business is still kind of globally capitated, but I think you're going to start seeing more and more of that shared risk business. I think it's more durable overall. I think there's going to be less kind of abrasion with kind of global cap kinds of entities as there's more and more shared -- it's more aligning longer term. I think outside of California, you're going to have more shared risk and/or just directly [Technical Difficulty] we really are the IPA. We are the network, and we are supporting the practices in terms of not only UM, but making sure that -- all the stars gaps are closed the way we want and the -- our risk adjustment gaps are closed the way we want. And frankly, that's what's caused us to get to 5 stars in North Carolina and Nevada. We have more visibility and control with the direct providers, PCP specialists and the hospital partners. And so, I think that's a trend that you're going to see more and more from us. And really, I think the team has done a very good job about kind of doing what we -- it's called de-delegation of UM. And we've done it in a win-win way, which is really important to us because we want to make sure that we're aligned with the providers and that collectively we can provide better clinical outcomes and better benefits for the beneficiaries.

Got it. That's helpful. As a follow-up, Jim had mentioned some favorability with SG&A, but that's being reinvested. Can you dimension that a little bit, both in terms of the sizing and then also where that reinvestment is going? Should we think about Stars or other items there?

Yes. Sure thing. The SG&A against the consensus guidance was a handful of million favorable in Q3. And as you noticed, we didn't adjust the full year expectations for SG&A. We kept those intact at around $385 million. So, what you're hearing from us is there was a little bit of timing issue with respect to the investments we're making. I would also say that we want to be well positioned for growth in 2026 and just make sure that we've got those resources ready. And so really, it's a timing issue. We kept our guidance intact and we outperformed a little bit in the third quarter. We think we'll kind of give it back in Q4.

The only addition to Jim's point is, it's kind of a part. The question you asked about where are we investing is what -- we're not talking a lot about yet, but we will just the continuous improvement that we're making to improve automation across the entire organization, improved AI logic in our Care Anywhere and AVA AI. And just even more, I would say, kind of productivity improvements and efficiency in a lot of our clinical programs. All of that's happening behind the scenes and that's where the dollars are being spent. And I think these investments that we're making now are really going to start paying out even more for '26 and '27.

Our next question comes from the line of Michael Ha with Baird.

Thank you and thank you for commenting on the investor debate about doing too much growth. I want to quickly clarify first on the flip side. If you were to do less growth, I imagine that would only serve to further empower your EBITDA bridge since you have less lower-margin new members. Is that fair to say as well? And then my real question on Star ratings, and congrats on your Star rating results back in September and today, I know you mentioned your overall raw Star rating score increased year-to-year, well within 4 stars. If not, I think you mentioned very close to 4.5, but when I double-click into the contracts, 315, 3443, the summary rating for Part C and Part D seem to be 3.5, but the overall star rating, of course, is 4.0. I know that there are certain measures excluded that go into that rating ending up at 4. But I guess that face value imply your underlying ratings might have declined instead of improved. So I was wondering if you could help sort of reconcile your commentary on the raw star ratings improvement versus the summary ratings that what they appear to indicate.

Yes, hey, Michael, it's John. Yes. No, our overall raw score went up significantly from 3.7, whatever it was 5.2 or something like that to 4.05 or 4.06. So we're really happy about the raw score increases. I think we can probably have a sidebar conversation with you on the mechanics of it. But really, it's a data science, this kind of how you think about the Part C, how you think about the Part D and kind of all that goes into it. But the raw scores absolutely went up, and we're happy about that.

Okay. And then on G&A, sub-10%, incredibly powerful. I know you're aiming for some more improvement on G&A going forward. And I think you're now actually planning for the first time to invest into your brand. I think I saw on LinkedIn, there's a commercial video. So I was wondering how should we think about the brand investment going forward. It seems like you're implementing it starting this year. And I guess my main question is, how should we think about this new marketing effort in terms of evolving your member acquisition costs near term, long term? I imagine driving member growth through marketing and advertisement might present opportunities on the cost side versus broker commission costs.

Yes. Michael, I'll take the first half, it's Jim here, and I'll let John talk about the brand. But as we continue to scale the business, there's going to be a natural decline in our SG&A ratio. But I think we're going to take a balanced approach to that in the sense that we want to continue investing in the business. And I would say it's not just brand, which John will talk about in a minute, but it's also making sure that we're reinvesting back in our clinical infrastructure and the other parts of the business so we can continue to evolve our model and step ahead of the competition. So I think as we think longer term, the SG&A trends will go down, but we got to be measured and balanced about it because we want to continue to invest. But John, over to you.

Yes. I think, Michael, we're just getting big enough that it's an opportunity for us to establish not only a brand for alignment, but really, it's an opportunity for us to demonstrate what is possible if you do Medicare Advantage the way it was designed to be operated, which is why we always talk about MA done right. And I think it's going to start really representing what was kind of reflected in that ad, which is it's all about serving seniors, actually changing the paradigm and the expectation, changing how people think about MA and all the good that we do and what all the good that MA can do. And so I think we're being very thoughtful about how to do that and what the brand is going to stand for. So stay tuned for that.

Our next question comes from the line of Jessica Tassan with Piper Sandler.

Congrats on the really strong results. So, I wanted to follow up on AEP. Can you just maybe offer some perspective on retention versus gross new adds for '26? Just interested in the dynamic between, obviously, the competitor with really rich dental benefits versus some service area exits from another competitor. Just how should we think about the composition of that 20% net AEP growth between retained members and gross new adds?

Yes. We're happy with both, Jess. Gross adds are strong across the board and retention is actually better than we anticipated across the board. So, it's a both and situation, which is where we need to be. The investments we've made in member experience is paying off. It continues to pay off. So really happy with both.

Okay. Got it. That's helpful. And then just as we look at Planfinder, it seems like Alignment stands out from kind of a core benefits perspective, so really favorable on metrics like average medical move, average outpatient max cost sharing, but maybe a little less generous on supplemental benefit. Is this an appropriate conclusion? And can you just explain the rationale or kind of the decision to structure benefits in this way? And then just secondarily, interested to know how Alignment seems to be managing through Part D redesign despite having relatively low deductible and co-pay versus co-insurance in Tier 3. Obviously, that's working for you guys in '25, and it looks like it will continue next year. So just hoping for some comments on structure of benefits.

Yes. No, it's -- everything is designed around consistency for the beneficiary. Everything is year-to-year. We're very thoughtful market-by-market. We've shared that with you all in the past, market-by-market business plans, strategies and consistency for value creation for each beneficiary is really paramount. It's the first thing we think about. And so, you're absolutely right. We have taken the same kind of approach this past year as we have in the past, very disciplined and detailed product design strategies. In our markets in California, Part D is very competitive. So, we didn't make any material changes there. There is some shifts to coinsurance in a couple of different markets, but I think we're pretty stable across the board.

John, I'd echo that. Stability is the name of the game. And as we said, we've done a really good job executing against Part D through 2025. And as we went into bids, last year's bids for this year, we were prudent and thoughtful about how we did it, but we were executing well through 2025. And so we're kind of felt good about the stability in our benefits. And so we think that sets up well for next year.

With respect to your supplemental question, a lot of our thinking around that has been also driven by not just the bid economics, but also by quality. Yes, so, we ensure our members that we provide the right quality of supplement benefits. And so that's just something we always think about in some cases, the answer is we pretty give ourselves [indiscernible] make sure we were absolutely providing like best experience not all. And so we were -- it was just something that was factored into some of our experience.

Our next question comes from the line of Ryan Langston with TD Cowen.

I guess on the guidance, I think you've raised the full year EBITDA guidance 4x over the last calendar year. I'm just trying to get an appreciation for what sort of levels you were thinking in your internal budgeting? Or was this really sort of a legitimate surprise? I appreciate the conservative guidance. Just wondering how this stacks up versus sort of where you had initially expected the year to shake out.

Yes. This is the new person second call as CFO, but I would say the following. What's happened this year is we've just had a lot of good execution in a very difficult year, okay? So, I guess a couple of things coming into 2025 that, that were new to the Alignment in the industry, which is we continue to have the second step of V28 phase-in. We had a brand-new year of IRA, and we had a -- unique to Alignment was we had a very large cohort of new members. And so against that backdrop, and we weren't ready to bet on final suites from 2024. So, you had all those things swirling around as we set the year out. And what's happened throughout the course of the year is we've executed really well. And I would say executed across a whole variety of dimensions well, whether it's ADK and some of the moves that we've made with engaging with providers to manage utilization in a very constructive way. I think Part D executed well for us across the board. We got some favorability from the final suite from our new members. And so there's an aspect here of working through a pretty big change in the business and the model over the last year successfully. And I think that points well for the future for us. It's one of the reasons why I joined.

Great. Just real quick. I appreciate the confidence in the 20% growth, but more just to industry growth. PMS is calling for basically flat year-over-year enrollment. I think the plan said they actually expected to decline. Just wondering if you have any view on overall MA market growth in 2026.

Yes, yes, California typically is lower than the industry, again, year-to-year. There is a lot of disruption out there. There's a lot of changes going on out there. And so again, we feel very well positioned on the growth side and the retention side.

Our next question comes from the line of Craig Jones with Bank of America.

So, I was wondering, as we enter the final year of V28, do you have any thoughts on the likelihood of a potential V29 in the next few years? And if there is one, do you have any thoughts on the positive or negative implications to using more encounter data as part of the risk adjustment calculation?

Yes. Craig, good questions. I think you're going to see some changes. This is what we hypothesize some changes with respect to how CMS is going to deal with HRAs. I think there's going to be more, shall we call it, program integrity around ensuring there will be clinical validation around an HRA, same with kind of chart reviews. The encounter-based baselining was referred to in last year's advanced notice. I don't know if they're going to be implementing any of that in this advanced notice. I would be surprised actually. It's something that has been discussed. But in terms of how to operationalize it in a timely way, again, I'd be surprised if it was introduced to impact 2027. I think from a policy point of view, a lot of what we're hearing about really is around kind of MA program integrity, so to speak, making sure that trust in the program is high and kind of gaining is eliminated. I think that's what we see. And it's unclear that they did go to an encounter-based baseline methodology. It's kind of unclear as to what the net impact would be. It is one of the reasons why we don't think it's going to get implemented for '27.

Got it. And then just as a quick follow-up to a question earlier. I think you said your raw score for your primary plan was 4.05. And then you've talked about how that HealthEquity index next year will give you like a cushion. I think you said previously 0.25 as a tailwind, all else being equal. Is that still correct and that mean primary plan about 4.5 for next year?

Depending upon where the cut points end up, that's kind of what we mean by that. It does give us a little bit of cushion, but we just really aren't sure what's going to happen with the cut points. We thought -- I thought that they would not be as aggressive as they were this past year. They were aggressive. We're actually really happy with the fact that we still got the 4 stars for all of our members. And I think you've also heard me say in the past, I'm not going to be happy until we get to 5 stars for every one of our plans. We're making progress on that front. But your logic is right. What we don't know is where the cut points will end up.

Our next question comes from the line of Andrew Mok with Barclays.

I wanted to follow up on some of the seasonal flu comments in the context of what's going on with the broader policy guidance on vaccines. Are you seeing any behavioral changes from seniors or vaccine uptake this year? And if so, how are you managing that dynamic?

Yes. It's a question that we've been looking at internally, and we follow our -- essentially our Part D cost, which is basically a lot of it is flu shots and literally tracking it daily, weekly. It seems to be trending pretty much in line with what we've seen in the past. I'd say a little bit softer in Q3, but picking up in October. So, I don't think we see a material change in the trajectory of that. And I think we're mindful in Q4 of just kind of flu as it impacts both the Part D costs, but also inpatient ADK. Q4 is typically a seasonal quarter where that impacts us a little bit more. So we are cautious about that, but it doesn't seem to be anomalous.

Great. And as a follow-up, John, you made a number of comments today on continued investments in all things, operational, clinical, tech stars. Can you help us understand how much of that investment spend is already captured in current spend versus what's new or incremental? And it'd also be helpful to understand how much of that investment or that spend is directly earmarked for things like Stars, especially in the context of cut points moving higher?

Well, I don't think it's any -- there's no leaps and bounds types of investment. What we're doing is we're being very smart in applying investment dollars. I'm talking about OpEx and CapEx across the enterprise. And that will be a little bit in the fourth quarter. What's really impacting the fourth quarter is more making sure we're prepared for growth as we typically are in Q4. But as we move forward, we're making sure that we have enough room to make the investments in the platform, in our capabilities, in our human capital, et cetera, as we go forward. But none of it is dramatic. It's just making sure that we find room as we scale to reinvest back in the business and do it smartly. And we're -- one of the things that I'm very focused on is making sure that we're really kind of underwriting that -- those investments smartly and making our choice as well.

Our next question comes from the line of Whit Mayo with Leerink Partners.

John, do you know what percent of competing plans in your markets were commissionable last year and how that compares to this year?

I can't answer that question. I actually don't know the answer. I know I do have a couple of plans stopped paying commissions. But I actually don't know and [indiscernible]. Most are still paying, just to be clear.

Yes. My follow-up was just on RADV. I was just wondering where we are on that, what the next steps are and how prepared do you think the organization is.

Yes and there's a little bit of a pause in the action, as you know, given the fact that the Humana case, the courts overturned RADV procedures based on Procedures Act violations. But I think our internal point of view is that CMS still has a lot of ways to pursue this, and we don't think that is going to go away. So, our base case is that it's going to be here. It's just a question of timing. But having said all that, we think we're well positioned. Our compliance or documentation processes are really good. We feel good about the operations and how we've set that up. And especially, we've never been an organization that has really relied on risk adjustment as a revenue tool. So, we're just being prudent about that. But we do feel as the base case is that it's going to be there. Washington is not letting go of this topic just yet.

Our next question comes from the line of Jonathan Yong with UBS.

Just in relation to kind of AEP again, just in terms of the live that are coming on to your books, how do they look? What's kind of the makeup in terms of, say, new to MA either and who might be switching on to your books from elsewhere? Just curious on that particular dynamic and if those members, given the volatility we've seen in the market kind of fit into the Alignment model?

Yes, it's consistent. It's still between 80% and 85% of switches. And really, it's across the board. It's not really concentrated with any particular payer that we're taking share from. It's kind of consistent across the board. And that's really in all geographies as well.

Okay. Great. And then just as we kind of just thinking forward a little bit here, but as we think about, say, next year, final year of V28, the pressures in the industry, generally speaking, should hopefully have abated at that point. How do you think about a potentially more competitive environment kind of looking in the medium term, particularly with respect to possibly expanding more beyond your current markets into other states or geographies?

Yes. Just remember, after V28 final third year phased in 2026, they're not going back to V24. So it's still going to be a tight reimbursement environment. Unclear what's going to happen on [ starters ]. But I think the way that you should think about us is our ability to manage the care for our beneficiaries allows us to control the costs. And in this new world of taking away, this is call the gaming associated with coding, the organizations that can provide the highest quality care at the lowest cost will ultimately be the winners, which is why you've seen us do so well in '24 and '25. And so when you kind of get it into '26, that's going to be even emphasized even more. So we feel really good about how we're positioned in '26 and beyond. And I think heading into '27, you need to start looking at what exactly are they going to do from a policy perspective. And I think we're all kind of waiting for that. I would just underscore program integrity, I think is paramount to where CMS is focused.

Our next question comes from the line of Ryan Daniels with William Blair.

Yes. John, maybe one for you. I noticed during your prepared comments, you mentioned the term replicability several times in discussing your business model. And I think we're seeing that with the good Star ratings outside of California. So, number one, how is that also translating into MLR performance and overall margins in those newer markets? And then number two, given that you brought that up several times, it wasn't lost on me. Is that an indication of more willingness from you and the Board to move into additional markets going forward?

Yes, hey, Ryan, yes, absolutely. What I've stated in the past is we really wanted to fund that growth from cash flow from operations. And obviously, we're going to kind of fulfill that promise. We're being diligent in looking at both new markets within the existing state footprint that's going to be the most capital efficient, brand efficient as well, as well as looking at some new states for 2027. And so, I think you're going to see us take a much more systematic kind of best practice playbook approach toward replicating into these new markets. I think we've come a long way in the last few years with our confidence not only in how we deploy the care model, but how we ensure that our shared services can scale in terms of ingesting the members, onboarding the members and then caring for the members. And I think that's going to be good for seniors everywhere. So, we feel really comfortable about that.

Ladies and gentlemen, I'm showing no further questions in the queue. And that concludes today's conference call. Thank you for your participation. You may now disconnect.