A.M. Best Downgrades Ratings Within PacifiCare Health Systems.

Business Editors

OLDWICK, N.J.--(BUSINESS WIRE)--May 15, 2001

A.M. Best Co. has downgraded the majority of the financial strength ratings of the PacifiCare Health Systems HMO's and life affiliate companies to B++(Very Good) from A- (Excellent).

The downgrades are the result of the weakened capital position of the operating companies, the instability of earnings due to the shift into a shared risk model from a capitated model and the prior instability of the senior management team.

PacifiCare reported a significant decline in earnings for the first quarter of 2001, primarily due to the costs associated with the shift of the company's operations to a shared risk model from a majority capitated model. A.M. Best believes the company will be challenged to manage the shift in the near-term and that the overall financial strength of the company will not perform to predicted expectations. PacifiCare maintains a debt to equity ratio of approximately 42% and also has goodwill of over $2.2 billion.

A.M. Best also believes that, since the earnings stream is not as predictable as it has been historically, PacifiCare will be challenged from a capital perspective to strengthen the overall structure of the company. The company has historically managed its capital position at each of its subsidiaries close to state mandated levels and the near-term possibility that each state will adopt risk-based capital standards for HMOs will place a further strain on the organizations overall capital.

PacifiCare has also experienced significant changes in the senior management over the last year. The current management, while experienced in the healthcare marketplace, will be challenged to turn the operations of the company to handle much more of the day-to-day operations than it has in the recent past. A.M. Best does anticipate that the company is going in the direction of operating in a shared risk environment; however, the new senior management will need to be proactive in its provider relationships, claims and utilization management and new and renewal business pricing in order to maintain positive earnings for the PacifiCare organization.

The rating downgrade to B++ (Very Good) from A- (Excellent) effects the following HMO and life affiliate companies: PacifiCare of Arizona, PacifiCare of California, PacifiCare of Colorado, PacifiCare of Oklahoma, PacifiCare of Oregon, PacifiCare of Texas, PacifiCare of Washington, PacifiCare Life Assurance and PacifiCare Life and Health Insurance Company. The rating of PacifiCare of Nevada was lowered to B+ (Very Good) from B++ (Very Good).

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.