PacifiCare’s Earnings Jump but Stock Slumps

PacifiCare Health Systems Inc. said Wednesday that second-quarter profit more than doubled, beating forecasts, as one of California’s largest health insurers began to get a handle on rising medical costs.

However, shares in PacifiCare fell 4.7% as investors questioned a decline in the funds the company set aside to pay medical claims and other benefits, which was enough to cover 30 days, down from 32 days in the first quarter.

“You never like to see the reserve days decline, especially when it’s a continuing trend,” said Peter Costa, an analyst at ABN Amro Inc. “It makes you question the quality of the earnings.”

After rising earlier in the day, PacifiCare Class B shares fell $3.44 to close at $69.13 on Nasdaq.CQ

Santa Ana-based PacifiCare reported second-quarter net income of $48.8 million, or $1.06 a diluted share, up from $18 million, or 37 cents, a year earlier. The earnings beat the 92-cent average estimate of analysts polled by First Call Corp.

PacifiCare Chief Executive and President Alan Hoops said he was surprised by the market’s reaction to the quarter’s results.

“I am suspicious that there is confusion out there about the degree to which reserve reduction has contributed” to earnings growth, he said in an interview. “I believe the quality of this quarter’s earnings are quite high. We anticipate continuing our improved results through the end of the year.”

Hoops said he expects the company will report 1998 earnings of at least $4 a share, beating the $3.80 consensus of analysts polled by First Call Corp.

PacifiCare reported the improved earnings after its troubled $2.2-billion acquisition last year of FHP International Corp., whose money-losing Utah operations turned out to be in worse shape than originally thought.