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DATE

Thursday, July 30, 2026 at 5:00 p.m. ET

CALL PARTICIPANTS

• Executive Chairman and Chief Executive Officer - John E. Kao
• Chief Financial Officer - James Head

TAKEAWAYS

• Health Plan Membership -- 294,000 members, representing 31% growth year over year.
• Total Revenue -- $1.3 billion, an increase of 32% year over year driven by membership growth.
• Adjusted MBR -- 86.3%, an improvement of 40 basis points year over year and the lowest since the company went public.
• Adjusted SG&A -- $115 million, which improved to 8.6% of revenue from 8.8% in the prior year.
• Adjusted EBITDA -- $68 million, representing 48% growth year over year and a 5.1% margin.
• H1 Adjusted EBITDA -- $106 million, a 60% increase compared to the first half of the prior year.
• Cash and Liquidity -- $702 million in cash, cash equivalents, and short-term investments as of June 30, 2026.
• Operating Cash Flow -- $111 million generated during the first half of the year.
• Funded Leverage Ratio -- 2.2 times trailing 12-month EBITDA.
• Embedded Gross Profit Potential -- $880 million, up from $600 million in early 2025, reflecting the maturity cycle of current members.
• Member Cohort Maturity -- 50% of current members are in their first or second year of coverage.
• AI Stratification Accuracy -- The AVA model predicts the 10% of members who account for approximately 70% of hospital admissions over a 30-day period.
• Full Year Revenue Guidance -- $5.20 billion to $5.23 billion, raised to reflect 32% growth at the midpoint.
• Full Year Adjusted Gross Profit Guidance -- $630 million to $650 million, with the low end raised by $10 million.
• Full Year Adjusted EBITDA Guidance -- $145 million to $163 million, with the low end raised by $7 million.
• Q3 Revenue Guidance -- $1.30 billion to $1.32 billion.
• Q3 Adjusted EBITDA Guidance -- $20 million to $30 million, reflecting the timing of seasonal investments.
• Reserve Adjustment -- $6 million added to bolster reserves during the second quarter.
• New Member Final Sweep -- $6 million benefit, or 40 basis points of MBR, related to 2025 membership.
• Admissions Per Thousand (ADK) -- Mid-150s, which improved sequentially and tracked with management expectations.
• Strategic Investment -- Double-digit millions in additional spending planned for the second half of 2026 for clinical and administrative scale.

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RISKS

• Head stated, "new member mix year over year, we just have a more acuity in the new member mix, which is adding a little bit more to the MBR across the board," noting that higher-needs members initially elevate medical costs.
• Head noted that in the third quarter, management anticipates "an earlier ramp of our clinical hiring in preparation for new market growth and expansion. Which will result in a seasonally higher MBR when compared to the prior year."
• Kao stated, "I think the regulatory and kind of legal footing surrounding stars is a little shaky right now," regarding uncertainty in Medicare Advantage quality rating benchmarks.

SUMMARY

Management reported second quarter results characterized by significant membership expansion and medical cost management. The company indicated that a substantial portion of its current member base is in the early stages of the tenure cycle, providing a foundation for future margin expansion as these cohorts mature. Leadership stated that the organization is prioritizing investments in AI-driven clinical stratification and back-office automation to achieve greater scale and portability of its operating model. While full year guidance was raised across key metrics, the company plans to reinvest excess performance into clinical infrastructure and market expansion preparations for 2027 and 2028.

• CEO Kao stated that the AVA AI powered stratification model now "accurately and dynamically predicts the 10% of members who account for nearly 70% of hospital admissions over the next 30 days."
• Management reported that 50% of new members in 2026 are in higher-acuity categories such as chronic special needs or dual eligible plans.
• The company plans to enter new markets within its existing state footprint in 2027 and expand to new states in 2028.
• CEO Kao reported that the embedded gross profit potential of the current membership has grown to approximately $880 million.
• CFO Head explained that approximately 30% of full year adjusted EBITDA is expected in the second half of the year, a shift from 40% in the prior year due to investment timing.
• Management indicated it is targeting 20% enrollment growth for the 2027 fiscal year.
• The company is shifting away from quarterly digital disclosure of the ADK metric to reduce noise, though it confirmed the metric improved sequentially this quarter.

INDUSTRY GLOSSARY

• ADK: Admissions per thousand; a metric used to track the frequency of hospitalizations within a member population.
• AVA: Alignment's proprietary, AI-powered technology platform used for member stratification and care coordination.
• AVA Care Anywhere: Alignment's clinical team model that provides direct care and monitoring for high-risk members.
• C-SNP / D-SNP: Chronic Special Needs Plans and Dual Eligible Special Needs Plans; Medicare Advantage plans tailored for individuals with specific severe conditions or those eligible for both Medicare and Medicaid.
• Embedded Gross Profit: The projected profitability of existing members as they stay with the plan longer and their care is managed more efficiently.
• MBR: Medical Benefits Ratio; the percentage of premium revenue spent on medical claims and healthcare quality improvements.
• V28: The updated Medicare Advantage risk adjustment model being phased in by regulators.

Full Conference Call Transcript

Operator: Good afternoon, and welcome to Alignment Healthcare Second Quarter 2026 Earnings Conference Call and Webcast. All participants will be in a listen-only mode. After today's presentation, there will be an opportunity to ask questions. To ask a question during the session, you will need to press 11 on your telephone. You would then hear a automated message advising your hand is raised. To withdraw your question, please press 11 again. We ask that you limit yourself to 1 question only. Please note that this event is being recorded. Leading today's call are John E. Kao, Chairman 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 12/31/2025.

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 they believe are important in evaluating performance. Details on the relationship between these non GAAP measures to the most comparable GAAP measures are reconciliation of historical non GAAP financial measures can be found in the press release that is posted on the company's website and our Form 10 Q for the fiscal quarter ended 06/30/2026. I would now like to hand the conference over to John E. Kao, Executive Chairman and CEO Sir, you may begin.

John E. Kao: Hello, and thank you for joining us on our second quarter earnings conference call. For second quarter 2026, health plan membership of 294 thousand represented year over year membership growth of approximately 31%. This drove total revenue of $1.3 billion which increased 32% year over year. Adjusted gross profit of $183 million represented an adjusted MBR of 86.3% which improved by 40 basis points year over year. Meanwhile, adjusted SG&A of $115 million improved as a percentage of revenue by 20 basis points year over year to 8.6%. Taken together, Q2 adjusted EBITDA of $68 million produced an adjusted EBITDA margin of 5.1% and represents 60 basis points of margin expansion year over year.

This quarter marks our lowest MBR as a public company and culminated in first half adjusted EBITDA of $106 million putting us well on track to achieve our full year guidance of $154 million at the midpoint. Importantly, we accomplished this while continuing to invest in our business. Our year-to-date performance reflects our unique ability to balance both growth and margin objectives by actively managing our members through our AVA Care Anywhere clinical teams. With 6 months of experience into the year, we have strong visibility into the acuity profile of our members, and remain focused on engaging our polychronic population who are most at risk.

Strong second quarter performance is supported by the deployment of the newest version of our AVA AI powered stratification model, This advancement improved our ability to predict which members are going to be hospitalized. Our model now accurately and dynamically predicts the 10% of members who account for nearly 70% of hospital admissions over the next 30 days. Innovation such as this and the deployment of our disease state registries support the proactive engagement activities of our AVA Care Anywhere teams. While we continue to demonstrate strong year over year improvement across each of our key financial indicators, an even greater opportunity remains ahead of us.

Given our rapid growth in recent years, approximately 50% of our members are still in a year-1 or year-2 cohort. This results in significant embedded earnings potential within our existing membership. Which we expect to realize as we engage members through our clinical programs over time. When we first shared the embedded gross profit potential within our membership in early 2025, we indicated a total opportunity of approximately $600 million of adjusted gross profit. Today, the midpoint of our 2026 full year guidance already indicates expectations for $640 million of adjusted gross profit. Meanwhile, the embedded gross profit potential of today's membership grown to approximately $880 million.

This positions us well to deliver further earnings growth from the existing members we serve today. While future membership growth further expands our embedded earnings potential. Equally important are the investments we have made in our core systems, cross functional workflows, and talent. Each of which are strengthening the durability and scalability of our MA platform. These investments are translating into better clinical outcomes. Reinforcing the confidence we have in our operations, and highlighting a core principle of our business, creating alignment among providers, members, and shareholders which enables us to do well by doing good. While we invest thoughtfully for the future, our near term SG&A leverage demonstrates the efficiency of our operating model and improving unit economics.

First half adjusted SG&A as a percentage of revenue of 8.7% improved 40 basis points year over year, and more than 300 basis points over the past 3 years. All of this was achieved while making investments like implementing a more scalable human resources platform. Clinical EHR capabilities, and enhanced claims processing systems. Looking ahead, we continue to see opportunities to invest in the second half of the year to drive further operating leverage in the future through automation of back office processes and greater economies of scale. As we capture these efficiencies, we expect to reinvest a portion of our savings in areas with tangible, measurable returns. This includes new market expansions, branding initiatives, and deepening our AI capabilities.

Beyond its potential to unlock efficiencies in our cost structure, AI represents a meaningful opportunity to further enhance our care model, and support providers. Most importantly, our approach to AI is grounded in decades of clinical expertise and reinforces our commitment to high quality care. This is further supported by a governance framework to ensure responsible use, human accountability, and equitable treatment of our members. In closing, our strategy of balancing rapid growth disciplined margin expansion, and continuous investment to scale our operations, remain unchanged and continues to underpin our story. We achieved this by putting seniors first and supporting our providers. Our second quarter results underscore the strength of our model.

As we move forward, we will maintain our disciplined approach to strike the right balance between growth and profitability. With that, I will turn the call over to Jim to discuss our financial results and outlook. Jim?

James Head: Thanks, John. I will dive into our second quarter results. For the quarter ended June 2026, health plan membership of 294 thousand increased 31% year over year. Supported by strong new member additions and high retention among our existing members. This drove revenue of $1.3 billion in the quarter representing 32% growth year over year. Second quarter adjusted gross profit of $183 million represented an adjusted MBR of 86.3%. Which reflects an improvement of approximately 40 basis points year over year. Adjusted MBR, excluding the final sweep pickup, related to our new members was 86.7%. Which was favorable to the midpoint of our guidance range. Overall, medical cost trends continue to track closely to our expectations.

Consistent with typical seasonal patterns in our outlook for the year, inpatient admissions per thousand, declined sequentially and core medical utilization was in line with our assumptions. Meanwhile, Part D and supplemental benefits expense ran modestly favorable to our expectations year-to-date. We believe each of these factors are supportive of our full year guidance. Turning to operating expenses. Our adjusted SG&A was $115 million, an increase of 29% year over year. Adjusted SG&A as a percentage of revenue was 8.6% which improved 20 basis points year over year, and outperformed the midpoint of our implied guidance range by 40 basis points, even as we continue to invest in our automation and scalability initiatives as John highlighted earlier.

Finally, second quarter adjusted EBITDA of $68 million grew by 48% year over year and produced an adjusted EBITDA margin of 5.1%. Which represents approximately 60 basis points of margin expansion year over year. In addition, first half adjusted EBITDA of $106 million represents an increase of 60% versus the prior year. Moving on to cash flow and the balance sheet. Generated $111 million in operating cash flow during the first half of the year, and our liquidity profile remains strong. We concluded the quarter with $702 million in cash, cash equivalents and short term investments. Lastly, our funded leverage ratio at the end of Q2 improved to 2.2 times our trailing 12 months EBITDA. Moving to our guidance.

For the full year 2026, we expect health plan membership to be between 298 thousand and 1 members. Revenue to be in the range of $5.20 billion to $5.23 billion, adjusted gross profit to be between $630 million and $650 million and adjusted EBITDA to be in the range of $145 million to $163 million. For the third quarter, we expect health plan membership to be between 296 thousand and 298 thousand members, revenue to be in the range of $1.30 billion to $1.32 billion, adjusted gross profit to be between $148 million and $158 million and adjusted EBITDA to be in the range of $20 million to $30 million.

With respect to our full year guidance, we are increasing our membership growth expectations given continued strength of our sales execution. In conjunction with the increase in our membership outlook, we are also raising our full year revenue guidance to approximately $5.2 billion at the midpoint, which reflects 32% growth year over year. Turning to our profitability metrics. We are raising the low end of our adjusted gross profit range by $10 million and increasing the low end of our adjusted EBITDA guidance range by $7 million to reflect increased confidence in our full year objectives following a strong first half of the year.

Spending a moment on seasonality, the midpoint of our full year guidance and year to date results indicate that we expect approximately 30% of our full year adjusted EBITDA to be generated in the second half. This compares to approximately 40% of full year EBITDA in the second half of the prior year. The change in our seasonality expectation is partially driven by a flatter slope to our Part D MBR along with investments we are making in our clinical operations during the third quarter. Meanwhile, we continue to take a prudent approach to our utilization assumptions across each of our major cost categories for the remaining 6 months of the year.

As we move into the back half of the year, given our strong performance, we will continue to make further investments in clinical innovation, AI, and talent. In the third quarter, we anticipate additional investments in AVA Care Anywhere, and an earlier ramp of our clinical hiring in preparation for new market growth and expansion. Which will result in a seasonally higher MBR when compared to the prior year. Likewise, we expect a greater portion of our full year SG&A expenses to be incurred in the third quarter compared to prior years due to the timing of our investments. In closing, we are very pleased with our performance throughout first half of the year.

Which reflects our continued disciplined focus on our care model and our members. And consistent execution against our operating plans. The progress we are making on the transformational progress we have discussed today further strengthens our competitive advantages long term. This reinforces our confidence in our ability to deliver continued growth, and capture the substantial opportunity ahead for Align. With that, let's open the call to questions. Operator?

Operator: You. Please press 11 on your telephone, then wait for your name to be announced. To withdraw your question, please press 11 again. Please limit yourself to 1 question. Our first question comes from the line of Ryan Daniels with William Blair. Your line is open.

Ryan Daniels: Hey, guys. Thanks so much for taking the questions. Appreciate it. Wanted to dive a little bit deeper into the Q3 guide. I think that is probably the focus of investors leaving out of the print. Can you go into a little bit more detail about just the timing of some of the investments you are making and any more color digging deeper into what some of those investments are, how transitory and then what benefits you see in the back half of the year, maybe more importantly, in 2027 and 2028?

James Head: Sure. I think there are probably 2 dimensions to this Q3 guidance. it is going to be seasonality aspect and then the investment aspect. So inside that seasonality we will we will dive into the investments. But sequentially, we are going to see a little bit of an uptick in our NBR, and that is from investments, it is a little bit year-over-year new member mix. And it is Part B. So think about those 3 components that are driving that. But as it pertains to the investments, we are just continuing to find areas to invest in the business.

And John and the team have been pretty consistent about this throughout the last couple of years in terms of putting ourselves in a position to really take advantage of the opportunity in front of us. So more specifically in the investments, we are going to make it in 2 different areas. 1's going to hit the MBR, and that is in our clinical operations. AVA Care Anywhere, preparing for new market growth and some other investments we are making there. And the other part is going to be in SG&A as we continue to push forward to get ready for market launches in 2027. And put ourselves in a position to get some returns in 2027 on these projects.

So think about automation, AI, things of that nature. They are not insignificant. And we think they are really good return and set us up for the long term. It could be in the second half, an additional double digit million across clinical and SG&A categories with the weighting of some of that being a little bit higher in Q3. Okay? But this is all very deliberate, and it is inside the financial commitments we are making for 2026. So to kind of step back for a moment, we had a great 2025, We are signing up for 2026 and delivering against a very good first half, as you know.

And still managing to invest in the business to put us in a good position for the future. Because we really feel it is there is a lot of opportunity in front of us. But it will it will impact the second half of the year in terms of our MBR and our SG&A, but we are still going to deliver on our commitment.

John E. Kao: Great. Super helpful color. Thank you. Thank you.

Operator: Please standby for our next question. Our next question comes from the line of Michael with Baird. Your line is open.

Michael: Multi part question. First, I am backing into roughly $6 million free benefit. Is that right? And if so, any reason why it is smaller than last year even though your book is larger this year? Second, noticed in the 10-Q, you had, I think, about $6.5 million of unfavorable prior year development this quarter. I was wondering if you could elaborate on the timing and nature of those costs. And then last, the underlying Q2 MLR excluding both those items, I am getting roughly around 86.2%. Is that about right? And any comments on, like, monthly cadence throughout second quarter? When it comes to? Thank you.

James Head: Let's do the 3 parts. The first 1 was the sweep. And this is Michael, you are referring to the new-member final sweep for 2025. And as you are aware, we take a prudent approach on that in the sense that we do not have visibility on that sweep. And so we tend to take a cautious approach and just book to the MMR until we see it. And the thing that can impact that beyond just the number of members, Michael, is the mix I think 1 of the bigger impacts is v 2028. that is the second year of v 2028 rolled into our 2025 dates of service. And then just risk sharing agreements around it.

So you are absolutely right. It was a smaller number than last year, and I guess you could call it on a per member basis. It was smaller. I think 1 of the bigger drivers there was v 2028. And so is it you know, you mentioned $6 million. that is circa pretty close to what it means. We talked about 40 basis points on the on the call in terms of impact. So that is point number 1. The second thing is prior period reserve. So just to kind of put in context, we are always looking at our reserve positions, and that is in all states of service.

Year-to-date, we are favorable by about $2 million on prior year. In total. and we feel good about where we are at. Like, inside Q2, we had a very solid quarter, as I just mentioned. And within that strong beat, we chose to bolster our reserves by about $6 million. Okay? And this is we looked at the development of the claims in 2025. And, you know, we are always looking at that and saying, can we take a position and increase our reserves And we looked at the quarter and said, this is a good time. This makes sense. And so we feel pretty good about our reserve positioning year-to-date.

And then the last 1, I just wanna make sure. I think you had the third part. Yeah. It was the if you were to exclude the unfavorable and the sweep benefit, am I thinking about underlying, like, core Q2 MLR at about 86.2? Yeah. I have not done the math Michael. But if you add if you add back the prior period, and then subtract out 40 basis points, I mean, it is a dollar and a percentage, but I think, you know, it is probably net around the same level on MBR. Okay. Thank you.

John E. Kao: Thank you.

Operator: Our next question comes from the line of Justin Lake with Wolfe Research.

Justin Lake: Thanks. Can you talk a little bit about Q3 seasonality in terms of Part D and why it is different? And then also in terms of in terms of the new member mix and why that is driving a difference there? Next.

James Head: Yeah. So, Justin, it sounds like you are asking to amplify on those 3 components or 2 of the 3 components. So the part d is just a little different versus last year. it is a flatter slope between the first half and the second half. And that is just kind of the behavior the, you know, in the second year post IRA and the behavior of our experience. And then the new member mix year over year, we just have a more acuity in the new member mix, which is adding a little bit more to the MBR across the board. And so if you compare it to Q2 last year, it is a little bit heavier.

But that investment that we talk about is a big piece of that. The investments in the clinical infrastructure.

John E. Kao: Thank you.

Operator: Please stand by for our next question. Our next question comes from the line of Matthew Dale Gillmor with KeyBanc. Your line is open.

Matthew Gillmor: Hey, thanks for the question. I wanted to see if you would be willing to share the 80 ks metric for the quarter or just year-to-date. And then more broadly for John, was curious if you would offer any perspective on just 2027 bids. I know you may be limited on what you can say in terms of your approach, but just be curious in terms of the perspective you would offer and how you think the industry will approach 2027 bidding. Thanks.

James Head: Yeah. Matthew, thanks for that. So as we mentioned on the call, 80 ks did improve sequentially. And, to be more specific, it was in the mid-150s and in line with our expectations. You know, given our membership mix and how we are tracking this year. So pretty much in line. I would say Matthew, that on an, you know, on an ongoing disclosure perspective, I think we are going to move away from digitally disclosing it every quarter. And I will give you the rationale. While it is really important internally how we manage the business, our clinical operations, etcetera, externally, it seems to create a little bit of noise.

And I think does not necessarily reflect the overall health of our operation. So Q1 or last quarter was a perfect example of talking about ADK and kind of creating probably more static than signal. But having said that, we will we will find a balance because we want to continue to provide the right context around our performance and the trends going forward. So I know you are I know you are mindful of this, and we will be respectful of it, but it is just I do not know if we are gonna get into the digital precision that we have had in the past because it is it is not the story per se.

John E. Kao: Yeah, Matthew. John here. With respect to 2027, I mean, I am going to give you the standard, you know, it is too early to talk about the bids. With respect to our strategy. Obviously, competitive reasons. I will say I feel about as comfortable as I have ever felt about a overall product strategy. And the amount of work that went into it this year. I feel very, very strong about it, and you know, a lot of these investments we have been talking about are designed to realize scale and portability. that is what we think we need to prove, and that you are looking for us to focus on.

And everything is designed around that. it is it is scale and portability. I am really happy like, really, really happy about our progress along that front. And so that gives me confidence with our ability to support the growth we expect in 27. With respect to the industry, I think you are gonna have more of a mixed bag You know? I think you have got people still that are gonna be more margin focused than others. But I think they are gonna be more, or 2, maybe 3 players that come out of the woodwork that have not been aggressive over the last few years, and it would be a little bit more aggressive.

Just given some of the market chatter that we are hearing. Thanks, guys.

James Head: Thank you.

Operator: Our next question comes from the line of John Stansel with JPMorgan. Your line is open.

John Stansel: It seems like the MA technical rule has arrived at OMB somewhat sooner than some industry observers expected, and I think some have concluded that might mean a larger, more substantive rule. In your discussions, do you have a view or an expectation of what we might see from CMS when they roll out the new technical rule? Thanks.

James Head: I yeah.

John E. Kao: it is John. You got something new you can share? it? Because we are not privy to it, frankly. I yeah. I do not know. I am I am not I am not sure. We are all looking at each other going, did we miss something? John, are you there? It was no. it is just at the it is under review at OMB already, the 2028 technical rule. Oh. Oh. Oh, yeah. No. We have heard that. We do not have visibility to it. Yeah. If there is any if there is anything that would have caused it to get there this early, it probably would be around SARS would be my guess. But I do not know.

We have heard the same thing, that the ruling is in there now. But we do not know what it is. Technically. Thank you.

Operator: Please stand by for our next question. Our next question comes from the line of Kevin Fischbeck with Bank of America. Your line is open.

Kevin Fischbeck: I guess, last quarter, there was a bit of focus on MLR performance within California versus outside of California. Wonder if you could provide a little bit of disclosure about how those 2 sets of businesses performed? Thanks.

James Head: Yeah. Yeah, there is been some focus on the statutory filings in California as a signal to broader performance. I just would remind you that these are statutory financials. They are not linked necessarily to our GAAP consolidated parent company financials. But I would say the following that we have got a mature California market. that is performing quite well, and you have got pretty substantial growth over the last 2 years in our non California markets. And the right way to think about it is cohort maturation.

If you got a more mature portfolio, in our with our care model and our model that we employ, we actually see MLRs improving And so if the average kind of member is in 3, 4 years, we are versus 1, 2, you are gonna see a better MLR. And so there is there is a lot of embedded value in the ex California states. But we feel very pleased with how they are performing right now year to date. And so guess you will see some of that in the in the in the filings, but we generally do not operationally focus on those statutory filings as a proxy for our business. We run our business differently.

But I know investors have been focused on it. And we just feel like the we are we are tracking to our expectations across both of those arenas. Alright. Thanks.

John E. Kao: Thank you.

Operator: Our next question comes from the line of Jessica Elizabeth Tassan with Piper Sandler. Your line is open.

Jessica Tassan: So in terms of your long term MBR, I think in your 2025 JPMorgan deck, you all implied 93% year 1 and 82.1% year-5 MBR. That was based on 2024. And is that framework still valid after 3 years of V28, or should we assume some degradation And then just in light of the MBR opportunity on tenured members, should we kind of expect stable benefits in existing markets? And existing products in 2027? John, you mentioned 2 to 3 competitors could be more aggressive next year. So just interested if you could talk about how alignment is positioning for that change or for that expected change. Thank you.

John E. Kao: Just leave that cohort tracking and trending is directionally consistent with what we shared last year. there is really no change. The positioning around the embedded earnings potential that I spoke about is predicated on that. And so the way we are interpreting the this kind of notion of portability is to realize the same kind of earnings power that we have been able to generate in California is to plant those seeds in these new markets. And so when you are doing that, you are inherently gonna have a higher MLR because you have got so much growth proportion. Of your base.

So the more we are gonna grow ex California, the stronger the earnings potential there is going to be. And then a lot of the work that we are focusing on the investments is, again, designed to really scale this thing. Really scale. And again, I am really, really happy about the operational work we have done. The workflow processes, the technology, the addition of new teammates, all of which is terrific. So I am very, very happy And I think we have mentioned we are going to be entering new markets in 2027. Not new states necessarily. But really gearing up for that for 2028.

Again, all of that is in the kind of the longer term strategy to get to 1 million lives. And we are, you know, we are doing it. I am really happy with our progress.

Operator: Please stand by for our next question. Our next question comes from the line of Scott Fidel with Goldman Sachs. Your line is open.

Scott Fidel: Wanted to just ask about the, you know, the activities that you were implementing earlier this year around centralizing some of those sort of critical functions around some of the clinical and medical management exercises and sort of moving away from some of the delegated, sort of capitation that you had around that. How that is going, and then also just around the clinical investments that you are making in the third quarter. And maybe in the fourth quarter do some of those relate also to sort of completing or continuing you know, some of those centralization functions that relate into you know, some of the inpatient. Sort of management, particularly in the non California markets?

John E. Kao: Hey, Scott. John here. Yeah. it is a actually a very, very good question. it is a very strategic question. That we have paid a lot of attention to. And we are building out the end to end operational business model that incorporates different types of contracting strategies. And so in other words, whether we are globally capping with the provider, or we are doing a shared-risk kind of arrangement that is delegated. Or it is a shared risk arrangement that is de-delegated where we will do a lot of the administrative work.

And as we are growing our number of directly contracted providers that we are fully at risk with both the professional and the institutional side We are literally building out the end-to-end competency to take that risk, to manage that risk, such that we can really take advantage of the efficacy of AVA Care Anywhere. Without diluting any of the hard work on lowering overall admissions. That result from the AVA Care Anywhere rollout. And so we are we are we are we are we are we are a lot of the way through that process right now. And it will enable us to expand ex California irrespective of the type of contracts we enter into.

This gives us a huge amount of strategic flexibility to engage providers at their comfort level. And the whole idea is to create alignment with that provider with that health system, I think that gives us a big differential advantage over everybody else. And then you layer on top of that. And so the investments that we are making are just continuations of that theme. And it is and I alluded to it in script. You know, we are making investments in the stratification model to have that become more precise. We are making investments in you know, I will call it chart prep, you know, automation to make workflows easier for our nurses.

We are making investments in AI around all the back end administrative functions like MRA, like SARS reconciliation. All of that is starting to pay off And, you know, we have a lot of good people that worked for a long time that had a lot of value. We are adding to that great team of people now with some leaders that have abilities and experience at scale. it is all about getting to scale is the way I am looking at this. Hey, John.

Scott Fidel: Can I just ask a quick just follow-up question relating to this, just around the vendor issue, at least, you know, sort of the activities you are taking to address those issues earlier in the year? Just curious, of the $6 million in negative PYV, was that just sort of flow through from the same dynamics that you had talked about earlier in this year, or is that unrelated to that? Thanks.

James Head: Unrelated. Unrelated. We just took a look at prior year 2025 and wanted to bolster our reserves. The what we talked about in the last quarter was really just a January 2026 issue that we resolved. And I would just say as a footnote to that, it is performance has been outstanding year to date. it is it is Okay. Thank you.

John E. Kao: Strategy is working. And the reason it is working is we are we are surplusing and gain sharing more with the providers. I mean, so you develop that kind of operational muscle to consistently surplus with providers. We are not only there where I wanna be with all providers. Yet, but we are making huge progress. To create alignment. it is the whole point of alignment. To create alignment with the providers in each market with full transparency for the benefit of vaccine. that is what we are trying to do. And we are starting to make that work outside of California where my confidence level is.

We are gonna start to place some capital heading into 2027 and then more in 2028 K. Thank you. it is kinda consistent with what we have been saying all along. there is nothing really new there. We are just actually executing.

James Head: Thank you.

Operator: Our next question comes from the line of Andreas Mock with Barclays. Your line is open.

Andrew Mok: Hi. We have seen a meaningful upward drift in stars cut points in recent years as we shift focus to bonus year 2028 STARS what are your expectations for further movement in those thresholds, and how confident are you in your ability to perform against those benchmarks? Thanks.

John E. Kao: Yeah. Hey, Andreas. We are not sure. We are not sure about what you just said. We are we are very comfortable. You know, we are going through all the caps data. We just got the caps data. We are going through that. We expect to get other visibility to HOS data, etcetera, down the line. I think it is a little early to start speculating. About it. I will say that I think the regulatory and kind of legal footing surrounding stars is a little shaky right now. And you know, a lot of outcomes could be different based on how some of these regulatory changes are actually implemented.

You know, it is all related to a lot of the litigation that 1 of our competitors--we are going to compete with that--you know, another MA plan won that suit, and that has pretty significant implications for the rest of the industry. You know? And all we want really is a consistent and fair regulatory landscape. So I do not know is the answer to your question. But I feel good about our position. Great. Appreciate the color. Thank you.

Operator: Our next question comes from the line of Whit Mayo with Leerink Partners. Your line is open.

Whit Mayo: Hey, Tim. Sorry. I wanted to go back just to PYD. I know we are just gonna get the question. The queue says the PYD was due to deteriorating collections and higher costs. So I am just trying to reconcile your comments on proactive strengthening. I know these are not big numbers, but just wanted to flesh that out.

James Head: Yeah, it is consistent. You got 2 things going on in prior year, your payment integrity activity, collections, and then you have got your just how you are looking at the paid claims coming through. And that is you know, we look at all of our dates of service. it is across all the triangles and just make sure we are positioned well. And I think I think our MD&A is pretty accurate on that, but it you know, we feel good about our reserve positioning. When you have a prior year adjustment, you have to call it out in your financials, but we do this all it is just normal course of business across all our triangles.

K. that is helpful.

Whit Mayo: And just John, I do not know if you are going to share what new markets you plan to enter, but maybe what are some of the underlying characteristics of those markets?

John E. Kao: Yeah. In 2020 and you are right. We are not gonna share where until the bids are out. I mean, the final product bids are out. Public in October. But you know, we thought it would be prudent for us to still have that balance growth and margin profile in 2027. With pretty meaningful market expansions within the existing state footprint that we have. And then the expectation is to expand the number of states in 2028. And as we get closer to that, we will give you a little bit more visibility on how many.

But, again, all the work we are doing at, you know, 2025, 2026, part of 2027 We got to file service area expansions in February of 2027 28. So really a lot of the operational preparedness is in anticipation of scaling the business. And then, again, coming back to you with proof points on getting the same kind of the embedded earnings leverage in some of these new states. Okay. Thanks. Yep.

Operator: Please stand by for our next question. Our next question comes from the line of Jonathan Young with UBS. Your line is open.

Jonathan Young: Hey, thanks for taking the question. I just want to go back to the cost that is coming in Q3 and Q4. I guess, are any of these 1 time in nature or should we view these as ongoing costs? And then kind of similarly, as we think about how 2027 will shape up in relation to your growth strategy for 2028. Will we see these kind of investments where there may be a bolus, kinda leading up into the 2028 period? Thanks.

James Head: Yeah, it is a really good question. And I think in the near term, the second half of this year, we saw some opportunity to make some investment but it I think, you know, the cardinal rule is it is always inside our commitments. On our guidance, but also on our commitments to continue to take our SG&A level down. So 1 of the themes that you will hear from us consistently is we wanna make investments in the business to lower cost and then we wanna take some of that savings and reinvest it back in the business. And I think you are seeing that in action in the in the in the second half of this year.

On the SG&A front, investing back into new markets and branding, On the on the clinical side, we think we make those investments, and we are gonna get return in terms of 2 really important things. Our members benefit because we are we are helping to make them healthier. And we are avoiding cost. And so we think that, you know, that is a that is a win across the board. So all these investments we are making have returns We wanna keep it inside the guardrails of what we are committing to. Thanks.

John E. Kao: Thank you.

Operator: Our next question comes from the line of Parker Schmoore with Raymond James. Your line is open.

Parker Schmoore: Hey, good afternoon. I was just wondering if you could talk about your performance in your SNP members versus non SNP members and how those are tracking relative to expectations? And just a follow on that, you are adding a fair amount of C SNP members this year, and you mentioned some higher acuity in your new member mix. Just curious if those 2 dynamics are related?

James Head: Related and intentional. This year, we added 50% of our new members were in you know, C SNP eligible, D SNP eligible, and dual eligible. So, like, kind of the more acute categories. And what it what it the implications are, at least in the early part, that the MLR is a little bit elevated compared to a typical new member. But we are making that investment very intentionally because we think we can do very well with this cohort. it is You know, we our care model is really tailor made to help these populations and make them healthier and reduce costs.

So when we when we positioned ourselves in 26, we intentionally understood that there is going to be a little bit of a burden on our MLR in the beginning. And we think we can make these members you know, create an MLR that is very favorable over time. And so that was the investment we made. Again, this is back to this balancing act between staying in line with our commitments but also investing for the future. Thank you. Thank you.

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

Ryan Langston: Great. Thanks. Maybe on the 2027 bids, just putting aside the particular makeup, could we still expect that you are targeting a 20% enrollment growth in 2027?

James Head: I think that is fair.

John E. Kao: Yeah. No. I think that is fair. Right. Yep. Okay.

Ryan Langston: And then just I just wanna make sure. Maybe I missed this. I am sorry if I did. But, like, taking into account the suites benefit that was not guided for the $5 million EBITDA guidance raise at the midpoint and the investments you called out I think you said potentially double digit millions of EBITDA. Is it fair to say you could have raised the guide by that double digit million of EBITDA? Or were some of those investments already planned when you originally set the full year guide?

James Head: Yeah. I understand the point. Could, you know, could you just say pass on the know, pass on the sweep, so to speak? In and of itself. And I do think we did make some we are consciously making some incremental investments in the second half that are a little bit above and beyond what we originally had planned for in our guidance. So inside the year, we are we are sticking to our commitments, but we are seeing some opportunity to make some further investments. Yeah.

John E. Kao: Let's I will answer it this way. You know, if you guys look at the 10 k, you will see management is highly incentivized to get to at least $55 a share. Was just and so the way we are thinking about this is how do we do that? And part of that is in fact making these investments now in a year in which we are meeting high end expectations. I mean, it is like, why would not we do that? And so passing along, to you in a raise, may not have been in the best interest for long term ability to get through that target number.

This is all about long term And the guys are going in and out, you know, sorry. You know? But everything we are doing here is going to be I am pretty sure everything we said we would do, we have done. Consistently. And the 1 thing we are very focused on is this portability and scale machine. Okay. Thanks. Thank you.

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