A.M. Best Affirms Financial Strength and Debt Ratings of PacifiCare and American Medical Security After Merger Announcement

Business Wire, Sept 15, 2004

OLDWICK, N.J. -- A.M. Best Co. has affirmed the financial strength and debt ratings of PacifiCare Health Systems, Inc.'s (PacifiCare) (NYSE:PHS) (Cypress, CA) life/health and health maintenance organization (HMO) subsidiaries. A.M. Best has also affirmed the financial strength rating of A- (Excellent) of American Medical Security Group's (AMS) (NYSE: AMZ) (Green Bay, WI) insurance subsidiary, United Wisconsin Life Insurance Company. (See link below for detailed listing.) The outlook for all ratings remains stable.

These rating actions follow the announcement that PacifiCare has signed a definitive merger agreement with AMS. The merger--equity portion valued at approximately $502 million and assuming $30 million of AMS debt--is expected to be structured as an all cash transaction. A.M. Best expects debt-to-capital to remain under 35% in the near term, declining to under 30% in a year. Financial leverage and fixed coverage guidelines are expected to remain at acceptable levels for the current ratings. The transaction remains subject to regulatory review and approval. A.M. Best anticipates the merger will be completed by the end of 2004 or early in 2005.

A.M. Best believes the merger will give PacifiCare the opportunity to broaden its individual market and small and mid-sized employer segment penetration. Concurrently, the merger will allow PacifiCare to further expand its geographic reach in commercial lines and reduce reliance on its core markets, California and the Medicare Advantage business. Moreover, the merger is expected to enable PacifiCare to expand cross-selling opportunities for its specialty businesses. Upon completion, PacifiCare expects to run the operation independently, retaining current management and possibly transferring some functions to AMS.

AMS specializes in providing health care benefit plans for small-employer groups, individuals and their families in 33 states and the District of Columbia; however, it does not have a significant market share in any one state. AMS' operating performance continues to improve; although, medical membership has been steadily declining since 1999. Positive earnings, somewhat offset by dividends to the parent, have augmented capital and surplus. Additionally, declining premiums have reduced the capital requirement, thus strengthening 'AMS' risk-based capital (RBC) ratio to over 700%.

Based on conversations with both management teams regarding future capitalization expectations for AMS, A.M. Best concluded that affirmations for both AMS and PacifiCare's ratings were appropriate. PacifiCare's ratings incorporate its commitment to maintain consolidated statutory capital at regulated subsidiaries to be managed at 300% of Managed Care Organizations' RBC or greater. The ratings also recognize that AMS' RBC ratio may decline somewhat once it begins to grow membership and premiums but will remain within PacifiCare's guidelines.

A.M. Best notes that should PacifiCare's current earnings projection fall short of its plan, or its financial leverage increase further and coverage ratios decline, there could be negative pressure on these ratings. Other concerns relate to successful integration given that PacifiCare has not engaged in any sizable mergers for some time, and the challenges for reversing the declining trend of AMS' membership, especially in this increasingly competitive environment.

Finally, while the cash flow generated by the combined entities is anticipated to remain strong, the increase in PacifiCare's level of goodwill and intangibles weakens the quality of its capital.

For a complete list of PacifiCare Health System's financial strength and debt ratings, please visit http://www.ambest.com/press/091503pacificare.pdf.> For current Best's Ratings, independent data and analysis on more than 1,050 health companies and more than 130 HMO industry composites, please visit http://www3.ambest.com/health/.> For a list of A.M. Best's debt ratings, please visit http://www.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.