Fitch Affirms PacifiCare's `BB+' Rtg; Rating Outlook Negative.

Business Editors

NEW YORK--(BUSINESS WIRE)--Sept. 25, 2001

Fitch affirms PacifiCare Health Systems, Inc.'s (PacifiCare or the Company) `BB+' senior debt rating. The Rating Outlook remains Negative.

The rating considers the recent deterioration in PacifiCare's operating performance, modest levels of capitalization at the operating level, and high levels of debt refinance risk. The Company's profitability challenges can be attributed to a provider-driven movement away from capitated contracting and towards shared risk contracting, as well as to a continued poor operating environment in the Medicare + Choice marketplace. In response to these challenges, PacifiCare has devised and begun to implement a new corporate strategy. Executing this strategy is a senior management team that has undergone significant turnover during the last year, including the hiring of a new CEO, CFO, and other key operating personnel.

Through various changes in its product portfolio, the pruning of its target market, and a revamping of its operating platform, Fitch expects PacifiCare's profitability to improve. However, we project continued low levels for the remainder of 2001 and into 2002. The Company's ability to recapture returns comparable to pre-autumn 2000 levels is uncertain.

PacifiCare maintains approximately $805 million in outstanding debt - $705 million in bank debt and $100 million in senior notes. This translates into a ratio of debt to total capitalization of about 28%. Although this level of leverage is appropriate for the rating category in absolute terms, the structure is not: Full principal repayment is due in 2003, most of it in January. This exposes debt investors to a meaningful level of refinance risk, which should be tracked closely considering the Company's recent failed attempt at a capital restructuring. Although Fitch recognizes this risk, we would anticipate the bank group to again restructure its debt if other channels could not be tapped by the Company for refinancing purposes.

Santa Ana, California based PacifiCare is a leading US managed care holding company that is publicly traded on the NASDAQ. As of June 30, 2001, the Company reported total HMO membership of 3.6 million, total assets of $5.2 billion, and shareholders' equity of $2 billion. Although ancillary health insurance- related products are offered, the core managed care product portfolio consists predominantly of traditional closed-model HMO offerings. These are offered mainly to commercial accounts and government beneficiaries in nine states, with a meaningful concentration in California.