A.M. Best Places Ratings of UnitedHealth Group and Its Subsidiaries Under Review with Negative Implications.

OLDWICK, N.J. -- A.M. Best Co. has placed the debt ratings of UnitedHealth Group Inc. (UnitedHealth) (NYSE: UNH) (Minnetonka, MN) and the financial strength and issuer credit ratings of its subsidiaries under review with negative implications. This follows the announcement that UnitedHealth has signed a definitive merger agreement with PacifiCare Health Systems, Inc. (PacifiCare) (NYSE: PHS) (Cypress, CA). (See link below for a detailed listing of the ratings.) A.M. Best will continue to review this merger agreement and anticipates completing its full analysis, as well as taking the appropriate rating action by the end of 2005.

The merger--valued at $9.0 billion--is expected to be structured as a combination of debt (27%) and equity (73%). Pending regulatory approval, the transaction is estimated to close by early 2006.

UnitedHealth maintains industry-leading credit-worthiness. Well diversified operating cash flows provide excellent debt service coverage exceeding 20 times post merger. Debt-to-capital is not forecast to exceed the 30% range in the near term, owing to $5.9 billion of equity to be issued and free cash flows to be accumulated to finance the transaction. Furthermore, UnitedHealth's historically good capital position--consisting of significant retained earnings and conservative claims reserves--provides strong financial backing to its insurance companies and HMOs.

The proposed acquisition would strengthen several of UnitedHealth's existing businesses. UnitedHealth's Ovations business would vault to market leader in the Medicare Advantage market through PacifiCare's Secure Horizon's franchise, complementing its AARP Medicare Supplement business and positioning it well for Medicare Part D opportunities. Also, PacifiCare's acquired specialty businesses would augment UnitedHealth's Specialized Care Services offerings.

The acquisition would also strengthen UnitedHealth's customer base and network presence in several strategic markets, most notably California, Colorado, Arizona, Texas and Washington. This expanded presence would strengthen Uniprise's western U.S. network, and generate cross-sale opportunities with PacifiCare customers for UnitedHealth's Specialized Care Services.

A.M. Best's primary concern is UnitedHealth's growing capital structure exposure to goodwill impairment. UnitedHealth's continued appetite for large acquisitions and mergers will only continue to grow this exposure, which could negatively impact the firm's capital structure and borrowing capacity, and ultimately, its financial flexibility. Debt-to-tangible capital approximated 58% at year-end 2003, expanded to 99% at year-end 2004 due to the MAMSI and Oxford transactions, and is expected to exceed 100% once the PacifiCare transaction closes.

Specific to the proposed PacifiCare acquisition, goodwill impairment risk is driven by the medium-term uncertainty of Medicare Advantage program funding levels. Medicare Advantage cash flows are less than half of PacifiCare's free cash flow, accounting for a meaningful percentage of the proposed transaction's goodwill.

For a complete list of UnitedHealth Group Inc.'s financial strength, issuer credit and debt ratings, please visit http://www.ambest.com/press/070801unitedhealth.pdf.

For Best's Debt Ratings, all other Best's Ratings, an overview of the rating process and rating methodologies, please visit http://www.ambest.com/ratings.

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 http://www.ambest.com.