Cash Reserve Concerns Depress Health Stocks
Shares of PacifiCare Health Systems Inc. fell 18% on Thursday, the latest in a general decline this week in the health insurance sector after company disclosures about cash reserves sparked concerns on Wall Street.
Cypress-based PacifiCare on Wednesday reported a fourth-quarter profit of $37 million, in contrast to a loss of $26 million a year earlier. But investors Thursday plowed through the report and found fault with the company’s disclosure that earnings were buoyed by $16 million from unused reserves set aside to pay medical claims. PacifiCare shares dropped $4.84 to close at $22.16 on Nasdaq.
“The reserve issue was part of the decline today,” said Dan Yarbrough, head of investor relations at the company. “We need to talk and figure out with analysts where the concern is.”
WellPoint Health Networks Inc., based in Thousand Oaks, also has been scratching its head much of this week about the same issue. The company posted a 64% fourth-quarter profit increase Monday, but investors seized on what essentially was a footnote in its earnings report about cash reserves, driving down its shares 4.6% for the week.
Although not required by securities law, WellPoint and other firms disclosed more complex financial accounting formulas showing reserves over time. WellPoint said the company had $2.4 billion in medical claims-payable reserves at the end of 2002. That prompted questions on Wall Street about what that said about the company’s financial strategy and condition.
“Initially, when you see a number of that magnitude and you don’t know what it means, you get scared,” said Todd Richter, analyst with Banc of America Securities. “The concern and confusion over this is the reason for the pullback in WellPoint shares.”
Richter viewed the negative reaction by investors this week as a blip that will be cleared up when analysts become more familiar with the confusing accounting in the industry. Nonetheless, WellPoint scheduled a conference call today with analysts and David Colby, the company’s chief financial officer, to review the previously released numbers in hopes of allaying concerns.
Such concerns about the managed-care industry come after most of the major players have enjoyed a long run of hugely profitable quarters even as other U.S. corporations saw their profits hampered by scandals and the slowing economy. The health insurance industry, some analysts said, is in some ways a victim of its own recent success as investors grow nervous about whether the industry can sustain its stellar financial results.
The Standard & Poor’s managed-care index, which includes such stocks as WellPoint and UnitedHealth Group Inc., the nation’s largest managed-care firm, was up nearly 1% for 2002 even as the S&P; 500 index slid 23%. For this week, this sector’s index was down 4.2%.
Shares of WellPoint, which have been among the industry’s best performers, recovered somewhat Thursday to close up 35 cents to $64.85 on the New York Stock Exchange. But that remains well off its 52-week high of $89.20 in October and is down from $68.59 on Monday.
“There has been a great deal of confusion regarding details on reserves provided” in WellPoint’s results, said John Szabo, a health-care analyst with CIBC in a report Wednesday. “We continue to view [WellPoint] as among the most conservative companies in the industry with regard to its reserves, and we believe the data supports this view.”
WellPoint spokesman John Cygul said the company’s reserve policy has been “consistently conservative.”
