Elevance (ELV) Q2 2026: MLR Hits 89.7%, Net Income Falls 16%
Elevance Health's pricing still has not caught up with its medical cost trend. The benefit expense ratio reached 89.69% in the second quarter of 2026 \u2014 the highest second-quarter reading in at least five years and 337 basis points above the 86.32% posted in Q2 2024 \u2014 while premiums, the company's largest revenue line, grew by $8 million on a base of $41.3 billion, or 0.02%. Shareholders' net income fell 16.1% to $1,463 million even though total revenues rose. What holds the income statement together is not underwriting: it is $1,195 million of favorable prior-year reserve development booked in the first half, a 44.9% jump in second-quarter net investment income, and a 3.4% smaller diluted share count. Management read the quarter more favorably, raising full-year guidance on July 15 \u2014 a divergence this analysis returns to in Section 2-2.
- Consolidated Balance Sheet
1-1. Principal asset movements
| Item | Dec 31, 2025 ($M) | Jun 30, 2026 ($M) | Change % |
|---|---|---|---|
| Cash and cash equivalents | 9,491 | 10,232 | +7.8% |
| Fixed maturity securities (current) | 25,884 | 25,719 | -0.6% |
| Equity securities | 740 | 1,563 | +111.2% |
| Premium receivables, net | 10,073 | 10,991 | +9.1% |
| Self-funded receivables, net | 5,162 | 5,583 | +8.2% |
| Property and equipment, net | 4,679 | 4,645 | -0.7% |
| Goodwill | 28,344 | 28,339 | -0.0% |
| Other intangible assets | 11,200 | 10,983 | -1.9% |
| Total assets | 121,494 | 126,438 | +4.1% |
The receivable build deserves attention. Premium receivables rose 9.1% while the premiums they represent were flat, and self-funded receivables rose 8.2%. That divergence is a collection-timing signal worth tracking into the third quarter, though at a single half-year it is not yet a trend.
Goodwill and intangibles were essentially static \u2014 no acquisition of consequence closed in the period. Amortization of other intangibles fell to $110 million from $147 million in Q2, a small tailwind to reported operating income that reflects the aging of prior deal intangibles rather than any operating improvement.
Accumulated other comprehensive loss widened from $(451) million to $(711) million, driven by a negative swing in net unrealized investment gains over the six months. This is a mark on the available-for-sale bond book, not a realized loss, and it reversed the prior-year period's improvement.
On debt maturity structure: total long-term debt fell to $31,044 million from $31,896 million after the March 15, 2026 repayment at maturity of $750 million of 1.500% senior unsecured notes, and the $150 million of FHLB advances outstanding at year-end was cleared to zero. Only $375 million is classified current, against $10,232 million of cash. The $5,000 million revolving facility (maturing September 2030), the $5,000 million commercial paper program, and the FHLB lines were all fully undrawn at June 30 \u2014 near-term refinancing risk is not a live issue here.
1-2. Liability structure
Medical claims payable rose 8.1% to $18,463 million while current-period incurred claims grew only 0.9%. Reserves are being built faster than claims are being incurred, which is the conservative direction and is corroborated by days in claims payable rising to roughly 46.4 days from 43.6 days a year earlier \u2014 a metric we calculate from the filing, not one the company discloses.
The more striking move is \"Other current liabilities,\" up 33.4% to $13,681 million, a $3,426 million increase. Roughly $860 million of that is identifiable from the filing \u2014 the $593 million residual CMS risk adjustment accrual, a $125 million increase in income taxes payable (rising to $276 million from $151 million at year-end, per Note 7), and a $142 million increase in securities lending collateral payable (rising to $2,833 million from $2,691 million, per Note 4), all of which the notes place under this caption. The remaining approximately $2.6 billion is not separately disclosed in the interim statements, and it is the single largest contributor to the reported doubling of operating cash flow discussed in Section 3.
1-3. Capital structure
Total shareholders' equity rose 2.3% to $44,883 million. The composition matters more than the total: additional paid-in capital fell slightly to $8,917 million while retained earnings rose $1,282 million to $36,675 million. Because Elevance retires repurchased shares rather than holding treasury stock, buybacks are charged against paid-in capital and retained earnings directly \u2014 $1,134 million in Q1 and $236 million in Q2. Book value per share improved to $207.02 from $198.83; had the share count not fallen, it would have reached only $203.37, so close to half the gain is arithmetic from the shrinking denominator rather than earnings accretion.
- Consolidated Statement of Income
2-1. Second-quarter results
| Item | Q2 2025 ($M) | Q2 2026 ($M) | Change % |
|---|---|---|---|
| Premiums | 41,271 | 41,279 | +0.0% |
| Product revenue | 6,042 | 6,264 | +3.7% |
| Service fees | 2,108 | 2,283 | +8.3% |
| Total operating revenue | 49,421 | 49,826 | +0.8% |
| Net investment income | 486 | 704 | +44.9% |
| Benefit expense | 36,706 | 37,024 | +0.9% |
| Benefit expense ratio (%) | 88.94 | 89.69 | +75bp |
| Operating expense | 4,997 | 5,547 | +11.0% |
| Income before income tax | 2,292 | 1,937 | -15.5% |
| Shareholders' net income | 1,743 | 1,463 | -16.1% |
| Diluted EPS ($) | 7.72 | 6.71 | -13.1% |
The benefit expense ratio in historical context is the core of this filing. Second-quarter readings run 87.06% (2022), 86.38% (2023), 86.32% (2024), 88.94% (2025), and 89.69% (2026) \u2014 the 2025 and 2026 figures computed from this filing, the earlier years taken from the corresponding prior-year 10-Qs. The 86.32% posted in 2024 was the trough; the 337 basis points added in the two years since mark a medical cost trend that repricing has not yet closed. Management attributes the year-over-year increase to elevated medical cost trend in the Government businesses, partly offset by improved Individual ACA performance. Underwriting gross profit \u2014 premiums less benefit expense \u2014 fell 6.8% to $4,255 million in the quarter and 4.7% to $9,664 million for the half.
The operating leverage here is punishing and inverted. Total operating revenue rose 0.8%; pre-tax income fell 15.5%. Every incremental point of revenue is being consumed and then some. Below the operating line, the effective tax rate rose to 24.94% from 23.91%, subtracting a further increment from net income.
The gap between the 16.1% net income decline and the 13.1% EPS decline is entirely buyback arithmetic: diluted shares fell to approximately 218.0 million from 225.8 million, contributing roughly 3.0 percentage points of EPS support that did not originate in the business.
For completeness, the company's own adjusted measure tells a different story: Q2 adjusted diluted EPS was $7.45 against GAAP $6.71, a $0.74 gap, and management credited roughly $0.80 per share of net below-the-line benefit in the quarter \u2014 which is to say the adjusted figure leans on the same investment-income and non-operating items flagged above.
2-2. Cost structure and one-time items
Operating expense for the six months rose 15.3% to $11,877 million against 1.2% operating revenue growth. Two identified charges explain most of the excess: a $935 million accrual recorded in Q1 in connection with the CMS notice, and $129 million of Operating Model Transformation Program costs, both booked to operating expense. Stripping both out, six-month operating expense growth normalizes to approximately 5.0% \u2014 still roughly four times revenue growth, so an underlying administrative cost problem remains after the one-timers are removed.
Alongside these results Elevance raised full-year guidance, to at least $20.10 of GAAP diluted EPS and at least $27.00 of adjusted diluted EPS. Both figures come from the July 15, 2026 earnings release \u2014 the 10-Q itself contains no forward guidance \u2014 and the raise is a genuine counterweight to the deterioration catalogued above.
The apples-to-apples comparison, however, is the GAAP number, not the adjusted one. Against six-month GAAP diluted EPS of $14.73, a full-year GAAP floor of $20.10 implies only about $5.37 in the second half \u2014 materially below the first half. Management is itself guiding to a weaker H2, which is consistent with the benefit expense ratio trajectory rather than at odds with it. On the adjusted line, the identifiable add-backs \u2014 the CMS accrual, transformation costs, intangible amortization of $222 million, and $134 million of net losses on financial instruments \u2014 total roughly $4.91 per share after tax at the reported 24.2% rate. Investors bridging GAAP to adjusted should note that the CMS accrual represents a cash obligation, $342 million of which was actually paid on May 27, 2026.
CarelonRx's unaffiliated product economics also softened: product gross margin was 12.28% for the half against 13.29%, so the $638 million of incremental product revenue arrived with $679 million of incremental cost of products sold, compressing gross profit by $41 million in absolute dollars. This is the consolidated \"Product revenue / Cost of products sold\" line, which the filing defines as CarelonRx revenue from unaffiliated pharmacy customers net of rebates (affiliated volumes are eliminated in consolidation); segment-level operating income, which captures affiliated business and other items, is disclosed in Note 13 (Segment Information) and is not reproduced in the filing excerpt available for this review.
- Consolidated Statement of Cash Flows
| Item (six months) | 2025 ($M) | 2026 ($M) | Change |
|---|---|---|---|
| Net cash from operating activities | 3,071 | 6,245 | +103.4% |
| Net cash used in investing activities | (584) | (1,483) | \u2014 |
| Net cash used in financing activities | (2,217) | (4,009) | \u2014 |
| Cash at end of period | 8,560 | 10,232 | +19.5% |
Operating cash flow doubled while six-month shareholders' net income fell 17.8% to $3,227 million, lifting the operating cash flow to net income ratio to 1.94 from 0.78. (Note the period distinction: the 16.1% decline cited earlier is the second quarter alone; this 17.8% figure is the six-month total.) That ratio moving from well below 1.0 to nearly 2.0 in twelve months is not an earnings-quality improvement of that magnitude \u2014 it is a working capital swing. The single largest driver was a $4,124 million source from \"accounts payable and other liabilities,\" against $1,690 million a year earlier, which is the cash-flow mirror of the largely unexplained balance sheet build in \"Other current liabilities\" noted in Section 1-2. A second contributor was the smaller receivables drag, $1,831 million versus $4,097 million. Both are timing items; neither recurs by right.
Management's own guidance corroborates this reading. Full-year operating cash flow guidance was raised to at least $6.0 billion \u2014 yet first-half operating cash flow of $6,245 million already exceeds that full-year floor. The implication is that management expects these working capital sources to partially reverse in the second half.
Capital expenditure remains structurally light at $522 million, or 0.53% of operating revenue \u2014 this is an insurance balance sheet, not an asset-heavy one. Free cash flow on that definition was $5,723 million against $2,608 million.
Financing outflows nearly doubled to $4,009 million, but the composition is instructive. Buybacks ($1,358 million) and dividends ($749 million) together totaled $2,107 million, barely changed from $2,029 million a year earlier. Essentially all of the $1,792 million increase in outflows is a single non-operating swing: bank overdrafts moved to a $1,181 million outflow from a $631 million inflow, an adverse shift of $1,812 million. Debt activity actually worked the other way \u2014 net borrowing-related outflows fell by $355 million, as a $750 million long-term repayment replaced the prior year's $1,250 million repayment, partly offset by a $150 million net short-term borrowing outflow ($825 million of proceeds against $975 million of repayments) versus just $5 million a year earlier. Capital returned to shareholders absorbed only 36.8% of free cash flow.
- Issues Warranting Attention
Reserve development is carrying an outsized share of earnings. Favorable prior-period development was $1,195 million for the half, up from $1,065 million, and equals 28.2% of six-month pre-tax income against 20.9% a year earlier. Earnings are increasingly dependent on releases from prior-year reserves rather than current-year underwriting. The offsetting comfort is that the reserve is being rebuilt: days in claims payable rose about 2.8 days, and incurred-but-not-reported liabilities stood at $15,133 million for claim year 2026, $2,419 million for 2025, and $548 million for 2024 and prior.
The CMS matter is resolved on enforcement but not on quantum. On July 13, 2026 \u2014 two days before this filing \u2014 CMS confirmed that all required steps were completed, sanctions will not be imposed, and the enforcement process is closed. That removes the sanction risk. The financial exposure remains open: management states it is reasonably possible the liability could differ from the $935 million accrued by up to $320 million in either direction, against a remaining accrual of $593 million.
Separately, the DOJ Medicare risk adjustment lawsuit continues. Fact discovery closes August 31, 2026 and expert discovery May 10, 2027. No loss has been accrued and the company states the outcome cannot presently be determined \u2014 meaning no amount of this exposure is in the reported numbers.
Disclaimer: This article is provided for informational purposes only and does not constitute investment advice or a solicitation to buy or sell any security. It is based on Elevance Health's Form 10-Q for the quarter ended June 30, 2026 and the company's July 15, 2026 earnings release. Readers should conduct their own research and consult a qualified financial adviser before making investment decisions.
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