Alignment Healthcare, Inc. Common Stock 2026 Q3 Earnings Call

Good afternoon, and thank you for joining us on our third quarter earnings conference call. For the third quarter, 2026 health plan membership of 301,200 represented growth of 31% year-over-year and drove overall revenue of approximately $1.4 billion, a 37% increase year-over-year. Adjusted gross profit of $142 million represented an adjusted MBR of 89.5%, a 240 basis point increase year-over-year. Meanwhile, adjusted SG&A of $120 million represented an SG&A ratio of 8.9%, which improved by 70 basis points year-over-year. Taken together, adjusted EBITDA was $22 million within the range of our guidance. I want to spend a few minutes on the headwinds that emerged this quarter and the actions we have taken in response.

As part of our broader scaling initiatives, we began a comprehensive claims system migration last year designed to improve our payment speed, auto adjudication rates, and payment integrity capabilities. During this transitional period, we experienced greater volatility in claims processing. As this volatility normalized, we identified a notable increase in aggressive provider appeal and disputes in our paid claims data, which resulted in higher cost trends. Separately, during the quarter, we saw pockets of higher costs in areas such as catastrophic cases and skilled nursing, which also pressured medical expenses. To address the headwinds we experienced, we acted swiftly over the past several months to build out a more robust payment integrity function, including industry standard prepay claims edits and more rigorous post-pay review.

Additionally, we have moved quickly to manage and deploy our clinical resources more effectively and are making targeted investments to ensure our clinical best practices and operating rigor are applied systematically across our markets to reduce the variability in member outcomes. We are confident that the actions we are taking to scale our clinical programs will enable us to achieve the level of clinical effectiveness that we are accustomed to. We are pleased with the progress we have made across our multiple initiatives and saw institutional acute cost trends stabilized as we closed out September and entered October. Furthermore, we have experienced positive momentum across other cost categories. Despite our progress, we are taking a prudent approach to the increased trend seen in Q3 and assume that higher costs in the third quarter will continue to weigh on our results for the remainder of the year.

Given this position, we lowered our annual guidance to no less than adjusted gross profit of $575 million and adjusted EBITDA of $100 million. I want to emphasize that the guidance we have provided today is a guidance that we are confident in delivering. Furthermore, we have thoroughly reviewed each market to identify the issues that impacted our financial performance this year and mobilized quickly with plans to address them. Our revised outlook reflects both a prudent posture toward the cost pressures we are seeing today and a disciplined approach to forecasting the balance of the year. Our focus is now on execution, delivering against the commitments we are making today, and positioning ourselves well for 2027. As we enter 2027, we feel well-positioned to achieve our top-line growth target of at least 20% given the early results of this AEP.

Importantly, we bid prudently, reconciled those assumptions in the bids to the trends we are seeing today and have made adjustments in areas we saw room for improvement. At this time, we have a firm grasp of the underlying market dynamics we faced in 2026 and the actions required to address them. Taken together, we believe we will strike the right balance between growth and margins for 2027. We will share our thoughts in greater detail following AEP results in January. I would like to take a moment to address our Star Ratings for payment year 2028, which reflects performance for 2025 dates of service. We maintain a 4-star or higher rating in six of our seven eligible plans, demonstrating our ability to deliver strong Stars performance across much of our portfolio. At the same time, our California HMO contract earned a 3.5 Star Rating, which is below our expectations.

The shortfall in our California HMO contract was primarily driven by misses on several triple-weighted measures, particularly in HOS and Part D, as well as higher than expected industry cut points. We have already identified data and workflow opportunities within our Stars infrastructure and initiated actions across our enterprise to drive better and more consistent Stars performance. We have conducted more provider and member engagement initiatives to improve performance and survey measures, address data issues that impacted gap closure in Part D, and accelerated our progress in HEDIS gap closures to further strengthen our position in these metrics. These changes are in place and operationalized for the 2026 performance cycle. In conclusion, we continue to demonstrate profitable growth and are addressing the challenges that impacted our performance this year.

We have taken decisive action in those areas, and our revised outlook reflects a prudent view of the cost pressures we're seeing today. At the same time, we continue to invest in capabilities and operational changes that are important to support our next phase of growth. Over the past couple of years, we have evolved our leadership, processes, and technology architecture to support greater scale. We are already seeing benefits from some of these changes. This includes greater visibility and control over inpatient utilization through our partnerships with the providers to de-delegate institutional acute UM functions. We also continue to seek opportunities to assert more control over our pre-service UM for outpatient and professional costs where appropriate. Additionally, our clinical model remains a core strength of our business and primary driver of our unit cost advantages. The investment in claims processes, clinical operations, and Stars infrastructure build on that foundation.

With that, I'll turn the call over to Jim to further discuss our financial results and outlook.

Jim? Thanks, John. I'll dive into our third quarter results.

For the quarter ended September 2026, health plan membership of 301,200 increased 31% year-over-year, supported by strong member additions and high retention in our existing membership base. This drove revenue of approximately $1.4 billion in the quarter, representing approximately 37% growth year-over-year. Third quarter adjusted gross profit of $142 million represented an adjusted MBR of 89.5%. Approximately 100 basis points above the implied midpoint of our third quarter guidance, and an increase of approximately 240 basis points year-over-year. Approximately half of the year-over-year increase in MBR was driven by changes in Part D seasonality and additional clinical model investments, consistent with the comments we made on the Q2 call.

As John mentioned earlier, we also observed a notable increase in provider-led appeals and disputes in the quarter, along with elevated costs within our skilled nursing and catastrophic case categories. These components drove the remaining increase in MBR. Turning to operating expenses, our adjusted SG&A was $120 million, an increase of 27% year-over-year. As a percentage of revenue, adjusted SG&A of 8.9% improved 70 basis points year-over-year and outperformed the midpoint of our guidance range by approximately 90 basis points. We delivered this result even as we made incremental investments in our business previously mentioned in the Q2 call and John's commentary today. Additionally, included in the quarter was a benefit from lower incentive compensation accruals given our year-to-date performance against target. Taken together, third quarter adjusted EBITDA of $22 million produced an adjusted EBITDA margin of 1.6%.