A.M. Best Downgrades Ratings of Several Health Net Subsidiaries; Removes All Ratings From Under Review.

OLDWICK, N.J. -- A.M. Best Co. has downgraded the financial strength ratings to B++ (Very Good) from A- (Excellent) of Health Net Inc.'s (Health Net) (NYSE: HNT) (Woodland Hills, CA) life/health and health maintenance organization (HMO) subsidiaries in California. Additionally, A.M. Best has downgraded the financial strength ratings to B+ (Very Good) from B++ (Very Good) of Health Net's Northeastern subsidiaries. A.M. Best has also affirmed the financial strength rating of B++ (Very Good) of Health Net Health Plan of Oregon and Health Net of Arizona.

Concurrently, A.M. Best has downgraded the debt rating to "bb+" from "bbb-" on Health Net's $400 million 8.375% unsecured senior notes. The ratings have been removed from under review and assigned a stable outlook. (See list below.)

These rating actions reflect A.M. Best's assessment of the prior period adverse claims development reported in the first quarter of 2004, but related to 2003 and prior; the subsequent corrective actions taken by management; and the impact of those actions on future earnings.

In first quarter 2004, the company accelerated claims payment to reduce inventories in anticipation of a system conversion. The acceleration resulted in higher paid claims in the first quarter, which, in turn, caused actuarial models to establish higher reserves for business booked in 2003, thus depressing earnings.

Corrective actions have focused on strengthening and centralizing contracting policies, procedures and terminology, as well as paying claims in order of claims magnitude versus incurred date and increasing pricing in California and the Northeast. However, A.M. Best remains concerned over the accuracy of trend estimations for future pricing, given the turmoil in claims processing and the impact of these initiatives on the overall profitability of the organization. Over 50% of Health Net's membership was renewed during the first half of the year before pricing increases could be implemented. Therefore, future rate increases should affect accounts priced in the second half of 2004, and the total effect of the rate increases may not fully materialize until the first quarter of 2005.

Problems in the Northeast are related to higher than expected hospital cost trends. The company is implementing medical cost management initiatives to address this issue. Additionally, pricing increases in the Northeast were initiated in the first quarter of 2004. Significant membership attrition is expected and recovery could be impacted by competitive pressures. The Northeast may place a strain on the California plan, which is experiencing difficulties, although results did improve in the second quarter.

A.M. Best will continue to monitor Health Net's results. Should membership and earnings expectation fall short of the forecast supplied or other issues arise, further rating actions may be taken.

A.M. Best acknowledges Health Net's continued diversification among segments and products, improved earnings at the Arizona and Oregon health plans, as well as adequate capitalization of its regulated entities. A.M. Best recognizes that Health Net's management is committed to maintaining aggregated subsidiary capital at a minimum of 300% of Managed Care

Organizations' Risk-Based Capital (MCO RBC), thus exceeding mandatory thresholds. Excess cash has been used to pay down debt and reduce financial leverage, which currently stands at 23%. Over the near term, A.M. Best expects Health Net will continue to manage its financial leverage at or below 30% of total capitalization.

Finally, flexibility is deemed good, given a borrowing capacity of over $700 million from a bank line of credit.

The financial strength ratings have been downgraded to B++ (Very Good) with a stable outlook for the following subsidiaries of Health Net, Inc.:

--Health Net of California, Inc.

--Health Net Life Insurance Company

The financial strength ratings have been downgraded to B+ (Very Good) with a stable outlook for the following subsidiaries of Health Net, Inc.:

--Health Net of Connecticut, Inc.

--Health Net Insurance of Connecticut, Inc

--Health Net of New Jersey, Inc.

--Health Net of New York, Inc.

--Health Net Insurance of New York, Inc.

The financial strength rating of B++ (Very Good) has been affirmed with a stable outlook for the following subsidiaries of Health Net, Inc.:

--Health Net of Arizona, Inc.

--Health Net Health Plan of Oregon, Inc.

The following debt rating has been downgraded with a stable outlook:

Health Net, Inc.--

-- "bb+" on $400 million 8.375% senior notes, due April 2011

For current Best's Ratings, independent data and analysis on more than 1,050 health companies and more than 130 HMO industry composites, please visit http://www.ambest.com/health/.

For a list of A.M. Best's debt ratings, please visit http://www.ambest.com/debtratings/.

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.