A.M. Best Lowers the Ratings of Four PacifiCare HMOs.

OLDWICK, N.J.--(BUSINESS WIRE)--Nov. 17, 1999--

A.M. Best Co. today lowered the ratings of four PacifiCare Health Systems' health maintenance organizations (HMO) and affirmed five others.

Those companies whose ratings were lowered to A- (Excellent) from A are: PacifiCare of California, PacifiCare of Arizona, PacifiCare of Oklahoma, PacifiCare of Texas and PacifiCare Life and Health Insurance Co.

The action follows A.M. Best's completion of its evaluation of the financial implication of the Nov. 4, 1999 announcement by PacifiCare Health Systems that their board of directors authorized an aggressive share repurchase of nearly 27% of its outstanding shares of common stock, in addition to the 2.46 million shares repurchased to date. The rating also reflects A.M.Best's review of the challenges associated with PacifiCare's plan to acquire the Harris Methodist Health Plan, Arlington,Texas from Texas Health Resources.

A.M. Best believes that much of the stock repurchase will take place in the fourth quarter of 1999 and be financed primarily by drawing down on an existing credit facility. Depending on the market price of the stock at the time of the repurchase, the company's financial leverage is likely to increase considerably by the end of 1999. PacifiCare's debt level--already very aggressive for an HMO--will greatly increase as the company draws on its credit facility. Although interest coverage has been strong, A.M. Best noted that the increased debt burden will substantially reduce that coverage in 2000. A.M. Best acknowledges PacifiCare's historically strong cash flow trends and, if they continue, the company should be able to pay down the credit facility in the near term.

Although PacifiCare's earnings have been favorable in 1999, A.M. Best believes that earnings will be pressured in the future. The pressure will be derived from higher premiums and copayments for the Medicare+Choice members that could lead to decreased enrollment. To a lesser extent, the lower allowable annual increase in reimbursement rates for Medicare+Choice may affect earnings. Reimbursement for Medicare+Choice providers is limited by the Balanced Budget Act of 1997, and PacifiCare is susceptible due to its large concentration in this segment.

The acquisition of Harris Methodist, expected to close in early 2000, will add approximately 300,000 HMO members to PacifiCare of Texas and boost its current membership in the state to approximately 500,000. Harris Methodist, however, reported some of the largest losses for any HMO in the nation last year. Through June 30, 1999, Harris Methodist reported losses of $28 million. In addition, enrollment in Harris Methodist dropped 11,000 members in the third quarter of 1999. This decrease in enrollment was by design as Harris Methodist significantly increased rates in non-profitable rural areas. A.M. Best believes that the acquisition will also increase PacifiCare's goodwill by approximately $100 million.

A.M. Best believes that the current market environment in Texas is not consistent with PacifiCare's projected returns and they are, therefore, overly optimistic. A.M. Best also expects, based on PacifiCare's previous history relating to its acquisitions, that the company will be challenged with the Harris Methodist integration over the short term. This, coupled with the recent changes at several senior management positions, has created a potentially unstable operating atmosphere going forward.

A.M. Best affirmed the A- ratings of PacifiCare of Colorado, PacifiCare of Oregon, PacifiCare of Washington, and PacifiCare Life Assurance Co., and the B++ (Very Good) ratings of PacifiCare of Nevada and PacifiCare of Ohio.

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.