A.M. Best Upgrades Debt Ratings of PacifiCare; Assigns Indicative Ratings to New Shelf Registration; Affirms Financial Strength Ratings.

Business Editors

OLDWICK, N.J.--(BUSINESS WIRE)--Nov. 19, 2003

A.M. Best Co. has upgraded the debt ratings of PacifiCare Health Systems Inc.'s (NYSE: PHS) (Cypress, CA) senior unsecured and convertible subordinated notes to "bb" and "bb-", respectively, and assigned indicative ratings of "bb" to senior unsecured debt, "bb-" to subordinated debt and "b" to preferred stock issuable under a recent $600 million shelf registration. Concurrently, A.M. Best has affirmed the financial strength ratings of its operating life/health and health maintenance organizations (HMO) subsidiaries and changed the rating outlook for the Texas plan to stable. (See link below.) The outlook for all ratings is stable.

The ratings reflect improved earnings at the health plans, overall strengthened capitalization at the regulated entities and significantly lower financial leverage expected at year-end 2003. Offsetting these strengths are the challenges of operating in a highly competitive and regulated environment and Medicare+Choice concentration.

PacifiCare's turnaround effort continued to produce good operating earnings growth in 2002 and through September 30, 2003. While the improvement is directly attributable to the great strides PacifiCare has made in stabilizing its business model, improving pricing and health care cost controls and culling unprofitable membership, it has been aided somewhat by lower than anticipated health care cost inflation experienced by the industry as a whole. Earnings in the near term will most likely continue to improve as pricing for renewals reflects a conservative estimate of future claims cost.

Statutory capital at regulated subsidiaries, which increased to 300% of Managed Care Organizations' Risk-Based Capital (MCO RBC), exceeds mandatory thresholds and is deemed adequate for supporting the level of business risks. A.M. Best recognizes that PacifiCare's management is committed to maintaining aggregated subsidiary capital at a minimum of 300%. Additionally, the significant increase in cash and liquid assets at the holding company serve as a cushion of support for the subsidiaries should the need arise.

The quality of PacifiCare's balance sheet is greatly improved with the reduction of the proportion of intangibles and financial leverage. As of September 30, 2003, PacifiCare's debt-to-capital ratio was 33%, down from 38% at year-end 2002. Financial leverage is expected to be reduced further to 25% by year-end 2003 following the proposed conversion of $175 million of the 10.75% senior notes to approximately 3.8 million shares of common stock, issuable under the shelf registration. The conversion, when completed, will bring PacifiCare's financial leverage in line with its peers. Financial flexibility is further improved by a borrowing capacity of $150 million from an open bank line of credit. Strong operating cash flows and earnings provide ample debt service coverage at approximately 15 times.

In A.M. Best's opinion, sustained profitable growth in PacifiCare's commercial products while reducing reliance on Medicare+Choice remains to be demonstrated.

For a complete listing of PacifiCare's debt and financial strength ratings, please visit www.ambest.com/press/111901pacificare.pdf.

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

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.