A.M. Best Comments on the Extension of PacifiCare's Debt Facility.

Business Editors/Health & Medical Writers

OLDWICK, N.J.--(BUSINESS WIRE)--April 23, 2002

A.M. Best Co. views positively the agreement between PacifiCare Health Systems, Inc., Santa Ana, California, and its lenders to extend its credit facility of $735 million by two years beyond its original maturity date in January 2003.

Essentially, the agreement is subject to the repayment of $250 million of existing debt by year-end 2002. A.M. Best believes the company will be able to raise the required $250 million from its operating cash flows, supplemented by alternate funding, such as the use of an equity line put in place in the second-half of 2002. This development considerably reduces refinancing pressure over the medium term.

Nevertheless, significant concerns remain. They relate to PacifiCare's recovery from the earnings decline, which began in the third quarter of 2000, stabilization of provider relationships, continuing high financial leverage and uncertainties related to the suit recently filed by the Texas attorney general.

A.M. Best acknowledges that PacifiCare has made great strides in stabilizing provider relationships by reducing capitated arrangements on the hospital side, and the risk related to future shifts is mitigated by lessons learned from past experience. Earnings will most likely improve as pricing for the January 2003 renewals reflect a good estimate of future claims cost.

A significant challenge for the medium term is the execution of a much-needed shift in product mix. Declines in one of PacifiCare's core product lines, Medicare+Choice, remains to be offset by the growth of profitable commercial HMO business and the recently introduced PPO and Medicare Supplement products.

Another concern relates to PacifiCare's financial flexibility. Although a mid-term solution to the refunding of debt due in January 2003 has been found, it has not been without cost. The new facility calls for a 50 basis point increase in its interest rate. Additionally, the company's total debt to total capital remains above the norm for managed care organizations, and a senior note for $88 million is due in September 2003.

In 2001, a $100 million capital infusion was required for the Texas operation to offset losses and cover fines and penalties. Further, the Texas attorney general is suing PacifiCare for unspecified damages, alleging it was slow to pay medical claims to three physician groups, thus forcing them into bankruptcy.

A.M. Best recognizes PacifiCare's strengths stemming from its very good market position, recognition of its Secure Horizons brand in health care for seniors and its production of positive operating cash flow throughout its disruptions. Nonetheless, due to the continuing concerns, the ratings remain unchanged.

PacifiCare is one of the nation's largest health care services companies, serving approximately 3.5 million members.

A.M. Best Co., established in 1899, is the world's oldest and most authoritative insurance rating and information source. For more information, visit A.M. Best's Web site at www.ambest.com.