A.M. Best Upgrades Debt Ratings of PacifiCare.Business Editors OLDWICK, N.J.--(BUSINESS WIRE)--April 6, 2004 A.M. Best Co. has upgraded the debt ratings of PacifiCare Health Systems PacifiCare Health Systems (former NYSE: PHS) was a Fortune 500 healthcare company based in Cypress, California. It was acquired by UnitedHealth Group (NYSE: UNH) in late 2005, which continues to market health plans under the PacifiCare name. Inc. (NYSE NYSE See: New York Stock Exchange : PHS (Personal Handyphone System) A TDMA-based cellular phone system introduced in Japan in mid-1995. Operating in the 1880-1930 MHz band, PHS uses microcells that cover an area only 100 to 500 meters in diameter, resulting in lower equipment costs but requiring more base ) (Cypress, CA) to "bb+" from "bb" on senior unsecured of $325 million 10.75% due 2009 and to "bb" from "bb-" on convertible subordinated notes of $135 million 3.0% due 2032. A.M. Best has also upgraded the indicative debt ratings to "bb+" from "bb" on senior unsecured, to "bb" from "bb-" on subordinated and to "b+" from "b" on preferred stock Stock shares that have preferential rights to dividends or to amounts distributable on liquidation, or to both, ahead of common shareholders. Preferred stock is given preference over common stock. Holders of preferred stock receive dividends at a fixed annual rate. , issuable under the $600 million shelf registration. The outlook for all ratings is stable. These ratings reflect improved earnings at the health plans, overall strengthened capitalization at the regulated entities and significantly lower financial leverage. Offsetting these strengths are the challenges of operating in a highly competitive and regulated environment and the Medicare Advantage concentration. PacifiCare's turnaround effort continued to produce good operating earnings Operating Earnings Profits after subtracting expenses such as marketing, cost of goods sold, administration and general operating costs from revenue. Notes: Tax and interest expenses are not subtracted - operating earnings are synonymous with EBIT (earnings before growth in 2002 and 2003. 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. Earnings in the near term will most likely continue to improve as pricing for renewals reflect a conservative estimate of future claims cost. Consolidated statutory capital at regulated subsidiaries exceeds 300% of Managed Care Organizations' Risk-Based Capital (MCO MCO Managed care organization, see there RBC RBC red blood cell. RBC or rbc abbr. red blood cell RBC, n See red blood cell count. RBC red blood cells; red blood (cell) count (see blood count). ) 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 Cash, or property immediately convertible to cash, such as Securities, notes, life insurance policies with cash surrender values, U.S. savings bonds, or an account receivable. 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 in financial leverage. As of December 2003, PacifiCare's debt-to-capital ratio was 25%, down from 38% at year-end 2002. Financial leverage improved in 2003 following the issuance of 7.6 million shares of common stock in a public offering. The net proceeds Net Proceeds The amount received after all costs are deducted from the sale of a piece of property or security. Notes: In the case of an investor selling a security, net proceeds represent the proceeds from the sale minus any trading costs (i.e. commissions). from the offering--approximately $200 million--were used to redeem $175 million in principal of the company's outstanding 10.75% senior notes. PacifiCare is expected to maintain financial leverage under 30% in the near term. Financial flexibility is further improved by a borrowing capacity of $150 million from an open bank line of credit and $600 million available under the shelf registration. Strong operating cash flows Operating cash flow Earnings before depreciation minus taxes. Measures the cash generated from operations, not counting capital spending or working capital requirements. and earnings provide ample debt service coverage at approximately 5 times. In A.M. Best's opinion, PacifiCare's recovery has relied on profitable growth in commercial products. However, going forward, Medicare Advantage's contribution is expected to increase due to the Medicare Reform bill passed at the end of 2003. The following debt ratings have been upgraded with a stable outlook: PacifiCare Health Systems Inc.-- -- to "bb+" from "bb" on $325 million 10.75% senior unsecured notes, due 2009 -- to "bb" from "bb-" on $135 million 3.0% convertible subordinated notes, due 2032 The following indicative debt ratings under the $600 million shelf registration have been upgraded with a stable outlook: PacifiCare Health Systems Inc.-- -- to "bb+" from "bb" on senior unsecured -- to "bb" from "bb-" on subordinated -- to "b+" from "b" on preferred stock For current Best's Ratings, independent data and analysis on more than 1,050 health companies and more than 130 HMO HMO health maintenance organization. HMO n. A corporation that is financed by insurance premiums and has member physicians and professional staff who provide curative and preventive medicine within certain financial, industry composites, please visit http://www3.ambest.com/health/. For a list of A.M. Best's debt ratings, please visit http://www3.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. |
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