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Major health insurers appear to be off to an encouraging start this year — but a crucial test for the sector is still ahead.
Solid first-quarter results have helped lift investor sentiment, even as insurers continue to grapple with higher medical costs. Companies including UnitedHealth, Elevance, Cigna and Humana all beat estimates for the quarter, with some hiking their 2026 outlooks.
Those results were largely expected due to seasonal factors such as a milder flu season and weather disruptions that temporarily suppressed medical costs, said Barclays analyst Andrew Mok. A more meaningful signal, Mok said, is that insurers strengthened medical reserves — money set aside to pay future claims — adding a cushion that could support their outlooks.
But there's still a "huge caveat," according to Baird analyst Michael Ha.
Insurers have incomplete data on medical costs in the first quarter due to a lag in claims processing, as expenses like hospital stays and procedures can take one or two months to be fully reviewed and reimbursed. By the end of the quarter, companies may only have "real hard claims data" from January, so "we always tell investors to take the first quarter with a grain of salt," Ha said.
That sets up the second quarter as the real proving ground. As those delayed claims come in, insurers and investors can get a clearer read on whether medical costs are actually tracking as expected, whether companies have priced their plans appropriately and how their earnings could be shaping up for the rest of the year.
"The second quarter is the real underwriting hurdle to pay attention to as you get more claims data that crystallizes your performance for the year in a bigger way," Ha said. "If you clear that hurdle, that could imply positive earnings implications for 2026."
Beneath the surface, insurers' stronger start to the year also reflects steps they've taken to rein in costs after two years of significant pressure.
Ha said he attributes the quarterly beats to "conservative pricing" for key plans like Medicare Advantage. Those privately run Medicare plans have been a driving source of runaway medical costs for many insurers, as seniors use more medical services after the pandemic.
Companies have exited less profitable markets and shrunk membership, while also adjusting pricing and benefits to better align with rising medical expenses, Ha noted. For example, UnitedHealth in October said it will stop offering Medicare Advantage plans in 109 U.S. counties starting in 2026, impacting 180,000 members who had to look for new insurance options.
"Heading into this year, companies came in with a lot of inherent pricing cushion," Ha said.
Those efforts are beginning to show up in metrics such as medical loss ratios — a key measure of medical costs as a share of premiums — which came in lower than the Street had expected for several companies in the first quarter.
Barclays' Mok noted that first-quarter results were supported by strength across all major segments. In commercial coverage, higher premiums helped offset rising medical costs, while offering fewer benefits boosted Medicare performance, he said
Mok also said improved cost controls and stabilizing medical costs contributed to "surprisingly solid results" in Medicaid. He called that an "encouraging sign," even as states tighten eligibility and Medicaid enrollment shrinks.
Still, the industry isn't out of the woods yet.
The question is whether those improvements will hold as more complete data comes in during the second quarter.
Because of the lag in medical claims processing, insurers rely more heavily on estimates when reporting first-quarter results. Companies receive more medical claims by the second quarter, giving them a clearer read on underlying cost trends.
"Seeing how those claims develop into the second quarter will really help you understand whether you've priced your plans correctly," Mok said.
Ha said the second quarter will be especially key for Humana, which expects Medicare Advantage membership to grow 25% in 2026 while keeping benefits stable.
He said CVS Health followed a similar pattern in the second quarter of 2024, growing Medicare Advantage membership while maintaining benefits. But the company later missed its medical loss ratio targets by a wide margin as costs came in higher than expected.
While CVS is not a direct comparison, Ha said a repeat of its disappointing results has become a potential concern heading into Humana's second-quarter results.
The Affordable Care Act marketplace is also closely watched in the second quarter for insurers like Centene, Molina and Elevance, Ha added. A key data point is the Wakely analysis, released in late June, which helps determine whether insurers' revenue assumptions match the actual health risk profile of enrolled members, he said.
Even small shifts in enrollment or member health can lead to meaningful earnings gains or losses, Ha added.
Investors will be watching medical loss ratios closely, along with any changes to full-year outlooks as second-quarter results come in.
For now, insurers are benefiting from a favorable setup, but the coming months will determine whether that momentum is sustainable.